Investopoly

Read the full blog here. How long can we expect the current high interest rates to stick around, and what can we do to navigate this challenging financial climate? I share my  insights and tips on managing debt and restructuring loans to soften the blow of rising rates, while also taking a look back at interest rates over the past 40 years to make sense of the current situation. As we explore the impact of these higher rates on consumer spending, I also discuss how Australians have been taking advantage of lower interest rates by building up their buffers and reveal the surprising reasons why people with higher incomes have benefited more from low rates than those with lower levels of debt. Plus, I share two enlightening CBA charts that paint a clear picture of what's to come. Don't miss this essential episode to help you stay afloat in the rough waters of today's financial landscape!Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/If this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/ Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

Read the full blog here. What if your borrowing capacity isn't enough to allow you to invest in a high-quality property? Should you reduce your budget or consider investing  in shares? Discover the similarities and differences between property and share investments, as well as the benefits of borrowing to invest. Gain valuable insights on investing in the share market, the significance of timing, and the necessity of financial advice when investing large sums of money over extended periods. Don't miss this opportunity to enhance your investment strategies and grow your wealth through careful planning and expert advice.Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/If this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/ Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

Click here to read the blog online. What if inflation remains stubbornly high for over a decade? Today, I explore the potential risks of increased inflation and interest rates, based on compelling research by US firm Research Affiliates. We delve into the historical behavour of inflation since 1970 and discuss the significant impact of low interest rates and quantitative easing on the current inflation scenario.Join me as I examine the ripple effects of higher interest rates on borrowers, the possibility of a wage-price spiral fuelling inflation, and the role of housing costs and energy prices in the consumer price index. I also share insights on portfolio construction during these complex times, including strategies to invest in equities, REITs, and bonds without dramatically reducing exposure. Together, we'll navigate the challenges and uncertainties of the financial landscape, focusing on long-term goals and wealth-building strategies.Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/If this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/ Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

Some people plan to give money to beneficiaries (typically children and/or charities) before they pass away, especially if they consider they have more than enough money i.e., surplus wealth. Often, their thesis is that their kids can make good use of the money now, whilst they are younger, rather than waiting another couple of decades. By that time, they’ll probably already be financially established. I discuss what you must consider before making an early inherence. Inheritance tsunamiI’ve stated before that the amount of inheritance (mainly from the baby boomer generation) that is likely to be passed on will increase fourfold over the next three decades. Approximately, $3.5 trillion will be bequeathed over the next decade to reach $224 billion per year by 2050! That’s huge. However, according to ANZ Private Bank’s research, approximately 70% of intergenerational wealth transfers fail because of family conflicts and other problems. The best way to avoid many of these problems is to gift wealth prior to death. Inheritances are often received too late in lifeTypically, by the time both parents have passed away, most people are already (financially) well established. They have worked hard to pay for the costs of raising a family, repaying a home loan, investing in super and other assets. Receiving an inherence will only make an already strong financial position, even stronger. Arguably, and putting aside that I think a bit of ‘financial struggle’ is beneficial and necessary, it would be more useful for people to receive inherences earlier in life. It would help them upgrade their home sooner (and maybe get into a good public-school zone) and invest sooner, thereby benefiting from compounding capital growth. It’s possible that future generations could continue to benefit from early inherence if your children agree to repeating the practice. That is; I’m going to give you an early inherence on the understanding that you will make smart financial decisions, which hopefully puts you in the position of being able to do the same for your children. Of course, nothing is guaranteed especially when gifting monies.Avoiding family disputesMost family disputes can be avoided with clear, regular and forthright communication. If all beneficiaries know what their entitlements will be (when you die), a dispute is less likely. However, the best way to avoid disputes is to gift monies whilst you are alive – as you can maDo you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/If this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/ Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

Commentators often refer to the price of property relative to household incomes. For example, it is estimated that property in Melbourne and Sydney now costs more than 10 times the median household income. But is this really a meaningful measure because if it is, property cannot continue to grow at a faster rate than incomes (a point often made). If prices continue to rise faster than income, how will property be affordable?At the beginning of this year, I wrote about the factors that have driven property prices higher over the past four decades. I concluded that borrowing capacity together with higher incomes have increased 3.5x since 1980, whereas property prices have increased 4.5x. That is, prices have grown faster than incomes and borrowing capacity growth combined. Clearly, something else has contributed to property growth for it to be affordable for some buyers. It is worth stating at this point that borrowing capacity is likely to be flat in the future. That is, borrowing capacity will not increase anywhere near it has over the past four decades. That will probably have an adverse effect on property price growth in many locations. Do locations with higher incomes perform better? Data analyst, Jeremy Sheppard has done some work on this question and found there’s a weak statistical relationship between income and capital growth rates. The thesis is that people that earn more can afford to pay more for property. Therefore, we should invest in locations that have above average household incomes. A big problem with Jeremy’s analysis is that the data may not be accurate and/or out of date (which Jeremy acknowledges), so this thesis is impossible to test. I think the reality is that incomes do have an impact, but so do many other factors, so it is impossible to isolate the impact of income alone. Also, do you really need census data to identify the locations that wealthy people want to live in? I think those locations are pretty obvious.  What other factors may be pushing property prices higher? Approximately, one-third of Australians own their home without a mortgage, one-third own their home with a mortgage and one-third rent. That means that approximately two-thirds of Australians’ (owner-occupier) property decisions are driven by lifestyle goals. Of course, people will draw on financial resources other Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/If this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/ Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

All investment asset classes move in cycles. Investment returns are almost never linear. As such, investors must expect good and bad periods, which is why patience and discipline are big contributors to an investor’s success. I suspect that commercial property investors’ patience and discipline are about to be tested. This asset class is facing a lot of challenges. However, as they say, every cloud has a silver lining so there could be good investment opportunities over the coming months and years. What challenges is commercial property facing? Commercial property was the asset class that was the most adversely impacted by Covid lockdowns, especially the retail and office sectors. Commercial property landlords had to provide rent waivers and reductions to retail tenants to help them through lockdown periods. But, unfortunately, not all retail businesses survived which increased vacancy rates. Employees were also encouraged to work from home for long periods of time. This experience demonstrated that people did not necessarily need to be in the office full-time. As such, most of the office workforce has adopted a hybrid work model that involves working from home 2 to 3 days per week. The consequence of this is that large employers have reduced their commercial office footprint. In addition, businesses have been less inclined to commit to new leases until they can ascertain what long-term working arrangements may look like. The upshot of this is that tenant demand for office and retail property is very low at the moment.  That said, things are changing - albeit slowly. More employers are demanding that their workforce spend more time in the office. nab is probably the largest corporate leading this charge demanding all senior managers work from the office 5-days per week. I expect other large corporates to follow, especially if the unemployment rate normalises (it’s currently 3.5% - the normal level is circa 5%). But the real problem is cap rates!Cap rates is an abbreviated term for capitalisation rate. It is the key component used to value commercial property. Unlike residential property, the value of a commercial property is dependent on the rental income that a property generates (whereas residential property is driven more by the value of the underlying land). Therefore, to value a commercial property, you must apply a cap rate to its income. ThDo you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/If this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/ Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

Many people are attracted to borrowing to invest in property because of negative gearing tax benefits. That is, the (income) loss that an investment property generates helps reduce the amount of tax you pay on your salary or business income.  However, investing in shares also offers unique tax advantages. I thought it would be interesting to quantify and compare the taxation outcomes of these two investment options. Taxation of share market investmentsInvesting in shares can result in some attractive tax outcomes.  Tax credits Australia’s imputation system, which was introduced by the Hawke-Keating government in 1987, is unique to Australia. It seeks to avoid the double taxation of corporate profits. It does that by giving shareholders a credit (called franking credit) for the tax that the company has paid. For example, if a listed company makes a net profit of $100, it will pay tax at the flat rate of 30%, so its profit after tax is $70. If it pays the profit out as a dividend to shareholders, the shareholders will receive $70 in cash and a franking credit of $30. Therefore, if the shareholder has no other taxable income, when they lodge their personal tax return, the $30 franking credits will be refunded, meaning that shareholder has received $100 in total (being $70 dividend plus $30 tax refund). Therefore, investing in Australian shares which pay franked dividends is particularly attractive to taxpayers that have low tax rates such as super funds, family trusts that have adult beneficiaries with low taxable incomes, and so forth. Even if you are on the highest marginal income tax rate, you are only going to pay 17% of tax on (fully franked) dividend income, because the company has already paid 30%. If you invest in international shares, and Australia has a tax treaty with the country where the shares are listed, you may be able to claim a foreign income tax offset for the tax that you have been deemed to pay in that country. Although, these credits are not nearly as generous as the Australian imputation system. CGTCapital gains tax applies to share investments. If you hold shares for more than 12 months, you will be entitled to the 50% CGT discount, which means only half of the net capital gain will be included in your taxable income. As a rule of thumb, you can calculate yoDo you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/If this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/ Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

Borrowing capacity has reduced by around 30% over the past year due to the impact of higher interest rates and the increased 3% interest rate buffer that banks must use to calculate your borrowing capacity. This was eloquently depicted in this chart by CBA in February 2023. I wanted to explore the common strategies that people can use to safely maximise their borrowing capacity. How to borrow safelyI’ve written several times that building wealth is a marathon not a sprint. Whilst it is good to avoid procrastinating and invest as much as possible, you should never take high risks. When borrowing, it’s wise to plan for the worst but hope for the best. Look closely at your spending habits to ascertain how much you need to maintain a standard of living. Don’t rely (completely) on variable income such as bonuses. Test your ability to repay at higher interest rates – even if you think they are unlikely. And ensure you have adequate buffers in place to help you navigate any unforeseen changes in circumstances. As a rule of thumb, if you are borrowing more than 6 to 8 times your total gross annual income, be careful. It could be a sign that you are borrowing too much. Consider the risks. You must have an exit strategy that you can implement if everything goes pear-shaped. In my experience, it is unnecessary to borrow a huge amount to achieve your goals. People that do accumulate a lot of debt (i.e., what I would consider to be too much) usually do it because they are investing in the wrong properties. Property investing is a game of quality, not quantity. I would rather own one awesome, investment-grade property and have $1.5m of debt than a portfolio of 10 properties with $5.6 million of debt (I’m using an actual example of a portfolio that I saw recently). The former scenario will generate a lot higher risk-adjusted return over the next 20 to 30 years. My overarching point is, be careful. Don’t overborrow. Having said that, it is helpful to know what steps you can take to preserve and maximise your borrowing capacity. Here’s a few tips. Consider using a charge card instead of a credit card After many years (decades) of actively investing and using different banks, my wife and I ended up accumulating 7 credit cards! Notwithstanding Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/If this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/ Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

The unrefuted trend in all investment markets is mean reversion. It means that a period of below average returns is always followed by a period of above average returns. It is my thesis that investment-grade property in Melbourne looks attractive compared to other markets and that there are several economic tailwinds that may result in the median house prices doubling over the next decade. The macro environment is positive for propertyIn short, property prices are driven by the law of supply and demand. Demand for property is mainly dictated by interest rate settings, unemployment, and access to borrowings (mortgage lending). Supply is mainly dictated by volume of new construction and consumer sentiment i.e., whether people are willing to buy and sell property. In times of higher uncertainty, most people stop transacting, as we’ve seen over the past 12 months. Locking in higher discounts now will mean lower future interest rates All the big 4 bank CEO’s have commented that the mortgage market has become the most competitive that it’s ever been in history. Banks are offering unusually high interest rate discounts and cash incentives to win and retain customers. This chart (recently published in the AFR) suggests that banks are not generating a high enough return on new loans due to offering significant discounts. That means these discounts probably won’t last. I expect that banks will reduce discounting over the next 6 to 12 months once most of the low fixed rate loans have expired. As such, there’s a window of opportunity for investors to obtain an interest rate discount of 3% (or more) off the standard variable rate. Your discount will remain in place for the life of the loan. The chart below sets out interest-only investment interest rates after applying a 3% discount since 2003 (when the data set began) i.e., back testing to see what impact a 3% discount would have had. The average interest rate would have been 4.2% p.a. over the past 20 years (of course, this is theoretical because you would have never received a discount of that size). I think it’s realistic to expect your average interest rate to range between 4% and 5% over the long run. You should do your calculations assuming 6% p.a., just to be safe. CHARTWe need more investors to solve the rental crisis On average, borrowing capacity has reduced by around 30% over the paDo you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/If this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/ Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

I was listening to Morgan Housel’s new podcast recently (which I highly recommend by the way), and he said something along the lines of; once you define your investment philosophy, you won’t be distracted by any noise that doesn’t align with it. It really resonated with me. Success with investing is more about avoiding mistakes than anything else. Therefore, having a clear, well-defined (evidence-based) investment philosophy will help you avoid getting distracted by any unhelpful ‘noise’, and keep you on the on the straight and narrow. However, if you don’t have a well-defined investment philosophy, the risk is that you’ll be easily influenced and make financial mistakes. I thought it might be helpful if I shared my investment philosophy which I can solidify it into four principles.  Principal 1: Short term returns do not help you achieve long term goals You must align your investment decision time horizons with your goal time horizons. Most people have a long-term goal of enjoying a comfortable retirement. Retirement will last two to three decades, hopefully longer. Therefore, you must align your investment decision making with that time horizon. That is, ask yourself what the best investment is you can make today that will maximise your wealth in 10, 20, 30+ years from now. Short term returns do not create long term value. Let me share an analogy. If you operated a business, your long-term goal might be to create a sustainable and profitable business. Of course, you could reduce the price of your product for the next few weeks (offer a discount) to generate more sales this quarter. But that comes at the cost of creating long term value because it cheapens your brand and trains your customers to never pay full price. However, creating brand value might not improve this quarter’s results, but if you do it consistently, you are well on your way to deriving long term value.  The challenge with becoming a successful investor is that good, long-term investments just take time. That means investors must have a strong tolerance for delayed gratification – forgoing some wealth today for a lot more wealth in the future. As Warren Buffett says, the market is very good at transferring wealth from impatient to the patient (paraphrasing). There are no shortcuts to generating long-term returns. You just need to be patient. Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/If this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/ Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.