Today I’d like to share a little of what I’ve learned from investing through a number of economic cycles.
Lets start back in 1991
What a year that was!
“It’s lucky for Spurs when the year ends in one” sang Chas and Dave, and true to form in May of that year my beloved Super Spurs won the FA Cup led by England soccer heroes Gary Lineker and Paul “Gazza” Gascoigne.
The summer festivals later that year were even better.
In an exciting prelude to Blair’s ‘Cool Britannia’ era, legendary folk band The Levellers played to huge crowds with their hit songs:
“The year is 1991, it seems that freedom’s dead and gone, the power of the rich is held by few”.
Those of us who weren’t high on the traditional festival fumes noted perhaps just a hint of wry irony in 80,000 youths with identikit floppy hair singing along to “there’s only one way of life…and that’s your own“.
But we were young and carefree, and every second person claimed to be an anarchist, all set to “smash the state by ’98” as the slogan of the day went.
1991 – recession
That summer, you see, Britain’s “loadsamoney” excesses of the 1980s had come back to bite with a vengeance and the UK was in the midst of a deep recession which had lasted a gruesome five quarters.
Elsewhere in 1991, the Soviet Union collapsed and spiralling interest rates in Australia had seen the “recession we had to have” and real estate woes here too.
The greedy bankers and capitalist fools who owned houses and had speculated in shares would be ruined.
Thankfully, we were young and we’d never go down that route, though.
If only we’d studied our mod music history a bit harder, we’d have known that only a decade earlier another generation of idealist kids had thought exactly the same thing: “No corporations for the new-age sons!” mimicked The Jam song When You’re Young.
But Paul Weller went on in the same verse to explain:
“But you’ll find out life isn’t like that. It’s so hard to understand, why the world’s your oyster but the future’s your clam”.
And Weller was spot on because roll forward ten years to the next year ending in one (2001), we’d all moved on and I saw a lot of those young rebel friends strutting around the City of London, minus the long hair and anarchist tendencies, working as brokers, traders, bankers and bean-counters.
We’d grown up.
2001 – yet more gloom
In 2001, Spurs didn’t win the FA Cup, I didn’t go to any festivals and was working for a corporation in London.
Madonna and Guy Ritchie had yet to move into the area at that stage, but an average terraced house where I worked in Marylebone cost £632,900, which was a shade over 35 times my salary (ouch).
I lived 105km away from the office and commuted in daily (another ouch).
Worse, although the predicted Millennium Bug had not ended the world as feared, Millennium exuberance was now threatening to.
The FTSE approached the wildly irrational level of 7,000 as the tech stock bubble helped to drive stocks to dizzying valuations before the inevitable reversal.
By 2001, the world was indeed now seemingly ending as the FTSE collapsed to well below 4,000.
The capitalist fools who had bought shares and houses would all be ruined (again).
2011 – world sure to end this time
When they say that history repeats, they aren’t kidding.
Roll forward to the next year ending in one (2011), and we were in the aftermath of the great Global Financial Crisis.
The US and UK had experienced deep recessions.
Australian dwelling prices had fallen by around 6 percent or so leading to an unprecedented bout of online hysteria Down Under.
Meanwhile, the US government had by now stumbled into its debt ceiling crisis spooking share markets into wild intraday swings (ditto).
And ever onwards the cycle of doom and gloom goes.
The one thing you can be assured of as an investor is that it won’t be a smooth ride.
As the old saying goes:
“We’ll have seven to ten recessions over the next 50 years – don’t act surprised when they come.”
More than that, we’re human.
There will be bad relationships, worse investments, accidents, illness or other derailments along the way.
But usually in life, it’s more important how we react to what happens to us than what actually happens to us, and what determines the end result is likely to be persistence – the determination to continue regardless of what occurs.
Paying yourself first
Robert Kiyosaki, once said that the governments are smart because they pay themselves first by deducting their share of your salary at source.
If they didn’t, he said, people would spend the money and not pay their tax.
Based upon how a lot of people run their personal finances, he was probably right.
Kiyosaki took the point further, stating that the main difference between “wealthy people and poor people” was that the wealthy paid themselves first to invest in assets, while the middle classes and less well off spent their money on living costs, liabilities and luxuries, trying and ultimately failing each month to save some money.
Concept: Rich Dad Poor Dad
It’s essentially correct and a key reason why most people have a ‘portfolio’ of investments which comprise their house and some superannuation (and sometimes investment properties), and nothing else.
Why is that?
Largely because we make these super contributions and mortgage repayments compulsory and resolve to honour them come hell or high water.
Therefore if you are going to build a share or investment portfolio, you must have the discipline not to cash in the shares or investments for a holiday or a new car.
This is one reason that some people have done well in property, since they buy in popular locations and resolve to never sell.
2021 – the rules will have changed
Between now and the next year ending in one (2021) compulsory superannuation contributions will have been ratcheted up from 9% to 12%, and whether it is confirmed this year or some time in the future, the pension age will eventually be increased to 70.
People are likely to get very angry about this.
But the powers that be have very little or perhaps no choice.
They are forced to make these changes because the average superannuation balance is woefully – and I mean woefully – inadequate, by a factor of many.
Australians are well-paid in global terms and tend to earn a surprisingly high number of dollars in their lifetimes, but rather than saving and investing them, the majority elect to spend pretty hard too.
For this reason, most Australians of retirement age end up drawing some or all of the Age Pension, which is presently set at under $400 per week for a single person and under $300 per week for each member of a couple.
It’s little use complaining to the government about all this, for it has its own books to balance.
At some point we all need to grow up and take responsibility for ourselves which means saving hard and investing for our own retirement.
In another decade’s time, we’ll likely have had another stock market crash.
We can complain all we like but in 2021, 2031 and 2041 suburbs like Woollahra, West End, West Perth and West Melbourne will all still be expensive for housing because they are minutes from their respective capital cities near to which most people want or would choose to live.
We might even had had a recession, finally.
Sure, there will be always contrarian analysis, commentary and websites which practically implore you not to invest, because there is sure to be a recession, stock markets are bound to crash and property markets will inevitably recede.
Each of these observations is unquestionably true, since all economies cycle, every stock market crashes and no real estate market on the planet is exempt from periodic corrections.
After a century of data, though, Australian capital city real estate markets have not once receded below the troughs of a preceding cycle, and in an inflationary economic environment our stock markets will always eventually return to new peaks (while dividend income increases).
The long term trends in inflationary economies and markets are up and anyone who has employed a sensible and disciplined long-term approach will have done well enough over time to fund a healthy enough retirement and not add to the government’s ever-growing pension burden.
The rules of financial responsibility
Recall my thoughts on what is a reasonable time horizon for investing and building wealth.
1 year? 2 years? 5 years? I don’t reckon so.
How about thinking beyond your own lifetime?
Worryingly, there are plenty who see things differently, electing to spend their savings in order to fall below the assets tests and become eligible to collect the Age Pension:
“You can’t take it with you. You only live once. I plan to spend the last dollar on the day I die. I’ll take the lump sum on a SKI holiday and then live off the state pension!”.
If you are fortunate enough to be employed, then being a grown-up and taking responsibility for your finances means:
- eliminating credit card debt;
- eliminating bad debt;
- knowing the difference between needs and wants;
- not spending every cent you earn (and more);
- saving and retaining an emergency cash buffer;
- paying yourself first;
- investing the difference wisely for the future in a portfolio of assets;
- not trying to “keep up with the Joneses”; and
- protecting your wealth.
If you can stick to these basic rules of financial responsibility, then your retirement should be a comfortable and secure one.