The golden rules of investing + sharemarket wobbles

Hi everyone,

Hope you’ve had a good week.

There seems to be a real shift in sentiment from economists around the world that inflation is going to stay at these levels for longer than expected. Which means interest rates won’t come down as much as previously forecasted.

In this week’s finance wrap I’ll cover:

• Jobs market showing signs of weakening.

• Aussies are literally tightening their belts… by not eating.

• Now the International Monetary Fund is worried sharemarkets have got ahead of themselves.

• The rental squeeze continues, which means rents will continue to rise.

• How your superannuation fund performed in March.

• The golden rules of share investing.

Unemployment up… looks like it could be just the beginning

The unemployment figures for March were released yesterday with the rate rising to 3.8 per cent as 6,600 jobs were lost.

I must admit I’ve been amazed at how strong the job market has been when you consider how weak the economy is and the huge number of migrants who have settled here in the last 12 months. But all those new workers have been soaked up by the job market.

It makes you think bosses have stopped investing in their businesses with new equipment and have instead just added new staff. Maybe that’s why our productivity and business investment numbers are so bad.

But have a look at this chart from Alex Joiner at IFM Investors and those orange bits which signify whether there is a shortage or excess supply of labour. It shows the unemployment rate looks set to turn upward.

Aussies literally tightening their belts

Fascinating figures from the Australian Bureau of Statistics are showing how we ate less of our major food groups in the last financial year.

Back then inflation was running rampant, particularly fruit and vegetable prices. So we stopped buying them.

And research from Great Southern Bank confirms what we all know: women are better money managers than men. With the economy slowing and interest rates biting, it’s women who are cutting back on their spending more than men.

Happiest countries in the world

Despite all our belt tightening and financial stress we are still seeing the brighter side of life and ranking the 10^th happiest country in the world.

Gallup’s World Happiness Report 2024 was recently released and Australia is one of the happiest countries in the world. Overwhelmingly, the happiest countries tend to be small, with populations under 15 million people. Of the top 10, only the Netherlands and Australia could be considered larger countries in terms of population. 

In Finland, the happiest country, high levels of gender equality, a high level of trust in institutions and fellow citizens and low corruption are likely drivers. Free education, universal health care and family-friendly policies would also help.

Australians aren’t quite as happy as the Finns but far happier than other countries in our region, with the exception of New Zealand which is ranked just below Australia at 11th. 

But according to Ray White chief economist Nerida Conisbee, there is a generational happiness gap. The happiest Australians are older, aged over 60 years. In comparison, younger Aussies are far less happy.

Australians under 30 years ranked 19th in global happiness. This compares to people aged over 60 years, who ranked 9th. More concerning, this gap has mainly risen since 2010. At that time in Australia, the young were as happy as the old.

Less happy young people is not a global trend but does seem to be the case in Australia, New Zealand, the US and Canada. The Gallup report doesn’t delve into the source of lower levels of happiness, however there are potentially a range of causes. Rising social media use, income inequalities, the housing crisis, and fears about climate change are considered top of the worries.

For Australia, housing is likely a major factor. Fewer young people own homes now compared to older Australians at the same age. House prices have risen rapidly and, more recently, so too have rents.

Australia’s young are still much happier than most other countries, including those that are often given as examples of having better housing policies. 

Sharemarket wobbles… anything to worry about?

Earlier this month when the Australian sharemarket touched a record high I admitted I was nervous. Was it “peak greed”, with markets getting too hot on the back of irrational optimism?

On Wednesday the International Monetary Fund shared my uncertainty.

I’m old enough to have seen enough sharemarket crashes to be spooked in these situations. In the two weeks since that record high the market has contracted a dose of the wobbles. Most likely due to Iran’s decision to get involved in the Israel/Gaza conflict, plus uncertainty over whether US interest rates will fall by as much and as quickly as expected.

That sharemarket euphoria of just two weeks ago has taken a more sobering tone. The IMF has warned that the downward trend in inflation looks to have stalled, which means expected rate cuts in the US and Australia will stall as well.

The IMF is warning asset prices will fall because of a disconnect between markets and economic fundamentals. When they talk asset prices they mean share and property values. And the IMF is warning of a correction.

Basically the IMF reckons that markets are not acknowledging the delay in rate cuts and the impact that will have on economies and company profits.

The world’s most prominent investor, Warren Buffett, once said “be fearful when others are greedy and be greedy only when others are fearful.”

The rationale is that when others are greedy, prices for investments typically boil over and investors should be cautious as they are likely overpaying for an asset. Buying at the top of the market usually leads to poor future returns as values inevitably pull back and readjust to a normal valuation.

But at the bottom of the cycle, “peak fear”, investments are massively undervalued and underappreciated by investors. As Warren Buffet said in his biography, Snowball, "Cash combined with courage in a crisis is priceless."

Remember investment markets move in cycles. Every boom will end in a bust and every bust will end in a recovery. The timing of these movements is the unknown because markets are driven by the emotions and psychology of those people operating in them.

I’ll keep watching to see what happens.

Also, later in this newsletter I have a reminder of the golden rules of share investing.

Rents to keep climbing

Basically there are very few places to rent. According to SQM Research the national vacancy rate hasn’t improved at all and remains steady at just 1 per cent. As you can see from the SQM table, in March last year the vacancy rate was 1.1 per cent so over the last 12 months nothing has changed.

It’s a bit depressing for anyone wanting to find a rental as there doesn’t seem to be any solution to the issue. But for property investors (and we definitely need more of them to bring more supply onto the market), the shortage means higher rental yields and capital growth.

If you’ve been thinking of investing in property, good strong capital growth and strong rental growth are a pretty enticing combination.

Both Sydney and Melbourne recorded the same rental vacancy rate of 1.1 per cent, though Melbourne did record a slight rise in vacancies from the previous month of February.

Vacancy rates in the Sydney CBD (3.9 per cent), Melbourne CBD (3 per cent), Brisbane CBD (2.3 per cent), Adelaide CBD (1 per cent) and Canberra CBD (3.5 per cent) all increased in March.

Over the past 30 days to 15 April, the capital city asking rents for home units continued to rise by a further 1.3 per cent and 9.2 per cent for the year, which is triple the inflation rate.

Canberra and Hobart recorded declines in rents but Perth recorded the fastest increase of 2.8 per cent over just 30 days.

Capital city rents for houses fell by 0.1 per cent, which shows regional and home unit rents are driving the increases.

The national median weekly asking rent for a dwelling is $621.84 per week. Sydney recorded the highest weekly median rent for a house at $1,053.56 per week. While currently, Hobart units offer the best rental affordability of all capital cities at median $461.36 per week.

As sharemarkets keep rising, so do your superannuation returns

Super funds once again delivered a boost to members in March with another month of investment gains.

Leading superannuation research house, SuperRatings, estimates that the median balanced option generated a return of 1.9 per cent for March, which is an 8.8 per cent return for the first 9 months of this financial year.

The median growth option gained an estimated 2.3 per cent for the month, while the median capital stable option also rose by an estimated 1.1 per cent.

Pension returns also grew over March, with the median balanced pension option increasing by an estimated 2.2 per cent. The median capital stable pension option is estimated to have grown by 1.2 per cent, while the median growth pension option is estimated to increase by a 2.6 per cent for the same period. 

The following chart displays the change in the superannuation balance of a member who had $50,000 in their super account at the beginning of January 2020, before the COVID pandemic began to influence markets.

Assuming no additional contributions or deductions other than investment fees and taxes, a member who had $50,000 invested in the median balanced option at the beginning of 2020 would now have $64,406, while a member investing solely in an international shares option would have $74,888 and a member who invested in cash would have a balance of $53,244.

When measured from the depths of the COVID pandemic, the median international shares option within a super fund has returned 69 per cent, or 17 per cent a year since the lowest point of the pandemic. Which just reinforces why you need to take a long-term view with your super.

While investing in international shares has provided the highest growth, what can also be seen is the additional uncertainty in account balance each month, with the international share index displaying the largest ups and downs over the period.

The golden rules of share investing

When sharemarkets are looking a bit wobbly, I reckon it’s a good time to go back and remind yourself of the basics.

1. Do your homework before buying

Don't buy or sell on rumour, hunch or impulse.

2. Balance the risk and reward factors

Look closely at past performance and future prospects and remember the sleep test: if the worry of your shares falling keeps you awake at night, don't buy them.

3. Keep checking after you've bought

Investment conditions, company management and objectives can change.

4. Be patient

Don't expect to become wealthy overnight.

5. Income and capital appreciation count

Don’t forget, shares can bring income and capital appreciation. We often ignore the impact of dividends. Estimate both these factors and relate them to your personal tax situation.

6. Be alert to trends

Put the news through an investment filter. Political, economic, scientific events may have implications for some companies.

7. Be prepared for unexpected events

Review the situation promptly before taking any action.

8. Don't try to back every horse in the race

It is far better to hold a smaller portfolio of shares which you know well and are comfortable with than to invest in a larger number of companies in the hope of picking more winners.

9. Check the environment

Be reassured that the economic and market prospects of the company look fair for the year ahead. Don't buy a share just because the price looks cheap.

10. Take a loss quickly

Don't let pride or stubbornness prevent you from accepting a mistake and correcting it.

11. Consider upgrading your portfolio at regular intervals

Check your portfolio every six months.

12. Follow the market

Don't try to beat the trend. In bear markets, be cautious; in a fluctuating market, think twice; in bull markets, take greater risks.

13. Take profits

It is better to make a little less profit by selling too soon than to take the greater risk of overstaying the market in a stock which is overpriced.