3 places to invest as interest rates head south
With interest rates heading to zero, keeping your money in the bank has become a poor way to increase – or even preserve – your wealth. A better strategy, I believe, is a well-chosen portfolio of stocks. In this blog, I highlight three types of businesses that should provide compelling returns in the years to come.
It is relatively easy to consider how an investor rationally responds to declining rates – they look for better returns elsewhere. If rates on your term deposit went negative and it was costing you money to keep your money in the bank, would you leave it there? The answer is that you would look for alternatives, starting with the most liquid.
The most liquid alternative is probably the stock market – you can change your mind and usually exit immediately. Such liquidity is unavailable in tangible assets such as property and even less so in non-income producing assets such as collectibles.
But the stock market has its own set of risks and with interest rates now declining for almost 40 years, stocks are potentially so expensive they offer very little in the way of future potential returns.
A simple rule to remember when it comes to investing is: the higher the price you pay, the lower your return. As interest rates have declined, investors have progressively migrated into stocks pushing their prices higher. Consequently, investors are now buying long duration assets and locking in those lower returns.
If rates on your term deposit went negative and it was costing you money to keep your money in the bank, would you leave it there? Roger Montgomery shares three areas investors should watch for compelling returns. Click To Tweet
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Fraser
:
I think this boom in asset prices is reaching its end.
At a simple level when you invest money you are supposed to earn an income.
With term deposits that is NOT possible.
With property I have a high quality art deco apartment & the rent has dropped from 570 years to 430 a week. After all my costs plus depreciation im lucky to make 200 a week. Thats with no debt. So the average punter cant make money from property.
Finally, the dividend yields on shares keeps falling as central banks lower interest rates. Even in Australia its increasingly difficult to find any shares with few risks which are offering a decent dividend yield. Many have far too much debt or out of control pay out ratios.
We are reaching the point where asset prices are so high its getting increasingly difficult to make an income from any asset class.
At some point asset prices will fall to get a semblance of normality back into the system
Roger Montgomery
:
Thanks Fraser. I will only offer the observation that Australian residential property has rarely, if ever, been able to earn an attractive net yield which is why there are no listed REITS that invest in Aussie residential property.
david gunning
:
Great as always. Thank you Roger
Roger Montgomery
:
thanks for the encouraging words David
enrico rumi
:
Always appreciate the RM perspective. Definitely out of the box thinkers.
Just a thought, I can not see how international travel will get back to anywhere near 2019 levels even with a vaccine in the visible future. Refer to QLD Chief Medical Officer comments Jeanette Young regarding a vaccine. One will not know if the vaccine will work on them and it’s efficacy. If one goes abroad and gets sick, insurance, hospitals, being sick and not at home. Particularly the older and business travelers. Are companies going to support the risk of international travel? Being from the US living in Australia, I can not think of a scenario that would allow me to take the risk any time soon. Wish it were otherwise. Any furious rally will be time to take profits.
Roger Montgomery
:
I have some sympathy with that perspective too Enrico. Thanks for sharing.