Looking at the investment landscape over the last few years, we have seen residential property shoot up dramatically for about four or five years in a row. We have seen companies such as Woodside Petroleum and BHP double in value in just one or two years. The Australian share-market has experienced double-digit returns for a few years running, the Aussie dollar is strong, interest rates are still OK and life is good
Share-markets are rising in America and Japan, countries that were previously in negative stock territory. Even boring old bond yields have recently picked up. How long will the good news last? How long will it be until the next big market crash? What can we do to avoid the disaster? Will there be a disaster at all, or is the outlook fine and sunny forever?
Just remember that you heard the warnings here first.
I am not one of those people who come along after the event and say I told you so. Although it would give me a great degree of satisfaction in 2008 to say, I told you to invest in XYZ in 2006, it will probably make you want to beat me up Please just remember that you heard it here first so that I do not have to remind you in two years time
Lets have a look at some of the previous Boom & Bust Cycles to see how they compare.
Market ------Period ------Duration---- Market Gain ---Crash
US NASDAQ --1994-2000 -----7 years -----701% --------YES
Japanese ---1982-1989 -----7 years -----569% --------YES
Australian -1982-1987 -----5 years -----521% --------YES
Resources - 2002-2006 -----4 years -----289% --------Not yet
Source: IRESS & Challenger
As you can see, previous bull runs lasted from five to seven years and returns were from 500% to 700% before the crashes. The Australian Resource Boom has not been running for that long (yet) and its returns have not been that high (yet). This would seem to indicate that the Australian Resource Boom will not crash yet (yet).
There are those who say the crash will never come and there are many that say what goes up must come down. The arguments will not be settled until after the dust clears. On CNN in 2000, when US tech stocks were dropping from dizzying heights to rock bottom, there were analysts saying they could bounce back They havent yet.
There are those who are out buying houses now, thinking that the residential property market will double again in the next couple of years just as it did in the last couple of years. If you think that you can double your money again after you just doubled your money, then go to a casino, suspend disbelief or become an analyst
Become a realist agent
Ok, no-one ever said that I was a real estate agent. I have only ever owned a couple of slices of land, a couple of houses and the fantastic real estate deals that I have missed out on are as numerable as they are memorable. Ask me about the times that I almost made 400% in two years. Yes, it was more than once. Almost made 400%, but not quite
Realistically, residential property cannot double in the next two years. There are restraints on reasonable value, interest rates, repayments versus renting and affordability.
Realistically, the price of steel cannot double in the next two years either. Nor can copper, coal, oil, wheat, gas or any of the other commodities that us Aussies hold so much of, and the Chinese want so badly.
When rubber became scarce and expensive during World War Two, the Australian Army replaced its rubber garters with brass springs. Brass is now more expensive than rubber and you cannot imagine tying up your hair or your socks with brass springs, but during the war, that is what they did. When building materials were short and timber was at a premium in the 1950s, our chamfer board houses became fibro houses. Necessity is the mother of improvisation
When things become too expensive, we find a way around it. Be a realist. If our resources become too expensive for the Chinese, be assured that they will find another way. Australias ride on Chinese commodity consumption cannot continue forever.
Where to invest when property is slow and shares may crash
Be alert and not alarmed. I am not predicting that prices of coal, steel, oil and other exports will collapse. Nor am I stating that BHP shares will drop like a rock. I am merely suggesting that the prices simply cannot continue to climb as sharply as they already have.
We may find that commodities simply plateau, and lead to a plateuing of share prices, just as some sections of residential property are now leveling off. Like Mrs Buckets Mercedes, the shares may not crash as such, they may simply fail to proceed. (Does anybody else watch Keeping Up Appearances?)
Looking to the Economic Clock, one will see that when shares are leveling off after their peak, the next thing to invest into will be a) shares, b) commodities or c) property. (If you have never seen the Economic Clock before, do a net-search or call me now! This 200-year old tool is as essential for investors as a compass is to sailors.)
The Classless Asset
There is another area in which you can invest. This investment does not fit into the regular four asset classes of Shares, Property, Bonds and Cash.
The investment is outside of these traditional boundaries and also outside of the scope of the Economic Clock. Unlike property, shares and bonds, it does not move in predictable up and down cycles. There is neither a perfect time to buy nor a perfect time to sell. In fact, since 1960, this investment has outperformed the S&P500 with no correlated volatility. That means that for over 40 years, this investment has delivered better returns than the stockmarket and has not had the ups and downs of the stocks.
In years where the stockmarket was massively negative, this investment made positive returns. During wars and recessions it was also positive. During property slumps and wild inflation it also made strong returns with very little risk. Do you know what it is yet?
Its not gold bars: this investment brings an income. Its not term deposits: this investment has capital growth. Its not gambling, cheating, stealing or anything illegal, immoral or unlucky, touch wood. What if I told you that this investment is endorsed by several major banks, has full government approval and also contains excellent tax benefits for Australian investors? Are you ready to call me yet? Be a realist agent. Invest safely. See you on the other side of the crash.
Jeremy Britton DipFA SA(Fin) Disclaimer The information contained herein is of a general nature only, does not take into account your particular objectives, financial situation or needs. Accordingly the information should not be used, relied upon or treated as a substitute for specific financial advice. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Professional Investment Services nor its employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information. Jeremy Britton is an Authorised Representative (#298825) of Professional Investment Services, ABN 11 074 608 558, AFSL 234951. Approval # H450
Author Name:Jeremy Britton
Author Bio:
Jeremy Britton DipFA SA(Fin) started his careeer in Financial Planning in Sydney in 1992. He has owned and operated several businesses, including Financial Planning practices and retail outlets.
Jeremy is married with three children and lives on Queensland's Sunshine Coast. The family like to travel, thus improving the economy of several countries and giving Jeremy a reason to go to work.
The not-for-profit organisation "invest.org.au" was commenced in 2001 to help young investors with its irreverent "jargon-busting" style.
