The danger of stocking up on doom over markets

FEAR is a fantastic marketing tool, and the more shares forecasters scare people, the more they shell out, writes Barefoot Investor

Don’t believe all the gloom and doom of market forecasters.

FEAR is a fantastic marketing tool, and the more shares forecasters scare people, the more they shell out.

REG ASKS: I read a lot about a crash on the US stock market dated to occur on May 28 due to the debt level of the US economy. As a self-funded retiree, you can imagine my concern. I considered moving my money from its current investment strategies in my superannuation fund to cash. The 2008 crash cost me 40 per cent of my investment.

BAREFOOT REPLIES: Sorry I didn’t get back to you earlier, I was busy in my bunker, stacking baked beans and “doomsday prepping” for the global financial meltdown of May 28. Which was (strangely) a Saturday, when the market was closed. But if we take a slightly wider view, say Friday to Monday, the market rose 0.3 per cent. What a ride! Legendary billionaire investor Charlie Munger explains it this way: “People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts.” Seriously, if you trace back the doom and gloom headlines, they almost always lead to a sales page on the interwebs to purchase an investment newsletter. Fear is a fantastic marketing tool, and the more they scare people, the more they shell out. Unsubscribe from this rubbish.

 

TRAVELLER ADVICE

TIM AND CLAIRE ASK: We are Aussies currently living and working in Cambodia on a combined income of $1500 a month. We own a property in the suburbs of Melbourne worth $450k, with a $307k mortgage and rental income of $1564 before expenses. On what we are making, the mortgage is a struggle to maintain and we want to continue our life of travelling long term. Should we take the capital gains hit, sell the house and invest in shares, or keep on as we are?

BAREFOOT REPLIES: Sounds like a loaded question to me: you want to sell it, don’t you? But before you do, let’s look at it from both sides. On one hand, you could keep it. After all, it’s forced savings — and with interest rates this low, surely you can cover the gap, so long as there’s no major repairs or renos required. I doubt you’re adding to your superannuation in Cambodia, so it’s one asset that’s working for you. On the other, you could sell it. If it was your home, and it’s been less than six years since you started renting it out (and you haven’t bought another home), you won’t pay capital gains tax under the ATO’s “six year rule”. Then you should invest the money in a low-cost share fund. The main thing is, don’t rush into it: remember, there are large upfront costs in selling (like agent’s commissions) and buying again (like stamp duty).

FOLLOW YOUR NOSE

BARRY ASKS: I keep reading proof of financial advisers contradicting themselves. For us amateur punters who run a (successful) SMSF (aided by your weekly words of wisdom), how are we supposed to choose shares for an SMSF?

BAREFOOT REPLIES: You’ve nailed the paradox of the stock market: on each side of every trade there is someone with an opposing view. As for choosing shares, I have three things I look for. First and foremost, I only invest in businesses that make money. Sounds obvious, but of the 2200 (or so) businesses listed on the ASX, fewer than 10 per cent of them consistently make money over a five-year period. That narrows down the pack. From there, I look for companies that have low debt and a high return on shareholder equity. Finally, they have to have a “margin of safety” — in other words, they need to be going cheap at the moment.

MUM MAKES THREE

ALISHA ASKS: My mother is 73, on a pension, with limited savings after her divorce. She lives with me and my husband (we’re newly married) in our rental — in a granny flat underneath. We want to start looking at buying our own home but don’t want to take my mother with us. The problem is that she’s expecting it as she can’t afford to rent on her own or buy a property. But I don’t want to be tied to my mother’s purse strings until she passes. Help! What do I do with her? What are her — and my — options?

BAREFOOT REPLIES: This isn’t going to be easy, but you really need to help your mother. Sit down with her, and lovingly work through the options of where she can afford to live based on her income. The maximum age pension plus rent assistance works out at just over $26,000 a year — about $500 a week. She can afford to spend $150 per week on rent. That may involve moving out to the country, or finding a share house, or both. You and your husband don’t owe your mum a subsidised home for the rest of her life. You do, however, owe her unconditional much love, kindness and non-financial support.

SHEAR OPPORTUNITY

HELEN ASKS: I’ve recently moved back to New Zealand. I was wondering what the NZ equivalent of Australian Foundation Investment Company (AFIC) is, as I am going to begin my NZ share portfolio.

BAREFOOT REPLIES: You can buy AFIC on the New Zealand Stock Exchange. It’s exactly the same low-cost investment company that’s been around for well over 80 years. Then again, I’m not an expert on investing in New Zealand — there may be better sheep to shear over there!

 

barefootinvestor.com

The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice

Originally published as The danger of stocking up on doom over markets