It’s been a surreal week. The local share market plunged, apparently wiping $80 billion off businesses in one of the biggest falls in more than two years. The local volatility index soared 7 points to 22 per cent.
By Thursday, the so called economic collapse – “Our Day Of Reckoning”, as The Australian headlined it – has been supplanted by the story of Baranby Joyce’s love child. But on Friday, the United States was again in turmoil
The only people who Kept Calm and Carried On was The Reserve Bank of Australia.
The bank left interest rates unchanged at a record low of 1.5 per cent because business confidence and conditions remain solid. Inflation stayed below target, unemployment rose from a five-year low.
The bank got it righter than most.
So what’s going on? And are there any lessons for mere mortals like us?
The changes were sparked by investors believing we were due for a market correction, and getting out at the top and hoping to buy back in at the bottom. That’s what speculators do.
For the rest of us, here’s what the experts say we should do:
Don’t panic. Don’t sell. Hold tight!
Here’s a quick guide to what to do when a market goes into freefall:
- Buy shares in good businesses that generate real profits and attractive returns on equity. These firms hold up better under stress, making recovery more likely, even if the share price declines by 75% or more. What are called Blue Chip (relatively safe) stocks like banks are good. You know, whatever happens, these businesses will bounce back.
- Use dividends to re-invest. It’s a tried and trusted formula that has worked for some of the world’s biggest billionaires – a painless way to accumulate more capital.
- Keep costs low. There is a big difference between earning 7% and 8.25% on your money. For a 25-year-old investing $5,000 per month with hopes of retiring at 65, a 7% rate of return will get him around $998,175 by retirement. The 8.25% return will result in $1,383,610 in wealth. That’s 38.6% more money, or $385,435!
- Create back up cash and money generators. This is one of the single most important things you can do to cut risk. The Balance says this is a classic Warren Buffett tactic. Website The Balance says: “If Dairy Queen were to go bankrupt, he would still be rich from GEICO. If it were to go down too, he still has Nebraska Furniture Mart. If that were destroyed, there’s always Benjamin Moore Paints. If they were wiped away, he could always fall back on Coca-Cola. If they ceased to exist, there’s always American Express, the Washington Post, Wells Fargo, U.S. Bancorp, Johnson & Johnson, Borsheim’s, and MidAmerican Power. Plus, he makes millions sitting on various Board of Directors. All of this started with a paper route that provided his initial capital more than seventy years ago. Learn from it!
Why mortgage brokers certainly aren’t broke
While all this mayhem was convulsing the markets, The Productivity Commission produced a damning finding about why your mortgage deal may not be as good as you think.
In the 1990s brokers were the new disruptors of the major banks, acting on your behalf to get the best deal. Remember John Symond “We’ll save you!” over at Aussie Home Loans?
Well, like his company most brokers now act for the banks they were disrupting.
“The financial incentives of brokers are skewed in favour of the banks that pay them,” said the Commission.
Australia has 16,000 mortgage brokers earning some $6,000 in commission for an average loan.
Remember – you’ll be paying that commission!