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Low interest rates not fair for all

By John Hargreaves 11 May 2015 45

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When the Reserve Bank announced it was dropping the interest rate and the banks, to some degree, followed suit, there was some joy out there in the community.

The economists said that softening the fiscal environment was good for us. They said that the drop in the value of the dollar was good for trade and that it should fall further.

But hang on… While I’m no economist, I reckon I have to pay more for everything because what I could get for a dollar yesterday, I have to pay more than a dollar today. In simple terms, my dollar isn’t worth as much.

One good aspect though is that for people wanting to get into their own homes or those on crippling variable mortgages, they’re going to be a little bit better off each month. So for the great Aussie dream, it is good news. When I was a young parent, with a mortgage of 17 per cent, any reduction was meaningful in our lives.

Have you noticed how the prices for overseas goods like clothes and white goods have gone down because the dollar has dropped? Me neither!

Drops in interest rates appear to impact three parts of our community: the working young; the middle group where salaries and wages are ok, the finalising of mortgages is in sight, disposable and discretionary income is ok and the quality of life is reasonably good; and the retired cohort either on fixed pensions of self-funded retirees.

For the purpose of this view, I’ve ignored those on high incomes and those below the poverty line dependent on pensions, because the rich don’t think about prices (they just get what they want when they want it) and the people on benefits never have enough disposable income.

I’m a bit mystified as to how people are better off when they have a lower mortgage repayment eaten up by deterioration in the purchasing power of the mighty dollar. One would hope that they come out at least even and maybe a bit in front. This seems to be the lot of the working young.

The middle cohort are usually in a financial situation where they can ride out the fluctuations in fiscal fortune and cut their cloth or expand it out whenever the economic fortunes wax and wane. When I was in mid-career in the public service, I didn’t take that much notice of the global financial situation, I didn’t take much notice of how the dollar went up or down, I just noted that bread, petrol and smokes went up every year. That was how it was but my life style didn’t change all that much and I wasn’t on a high income either.

Now that I’m in my advanced years I associate with a number of people who are self-funded retirees. Many of them are articulate, well read and their views are to be taken seriously. I also see from time to time seniors’ journals and newsletters discussing the lot of retirees of both types.

Older citizens are either on the pension, live off superannuation at an income level considerably less than they had when in the workforce, or spend the returns on investments such as SMSFs or the share market. Some live off the returns on real estate investment, but not many.

Those on the age pension are at the mercy of the government of the day when it comes to the cost of living adjustment. Setting the pension at CPI increases or AWE increases still means pensioners don’t have any control over their pensions, the government of the day does.

Superannuants are in a similar position to “the pensioners”. The schemes dictate the percentage rise each half year. The others depend heavily on the market place where interest rates are pivotal. If the rates stay low, the income of the self-funded retiree stays low.

The interesting bit now is that we have an increasing ageing cohort who are living longer and have reasonably high health costs. Often their lifestyle is less expensive but their health costs are significant. Funnily, this same situation faces the working young families. Their lifestyle is less expensive because they don’t have a lot of disposable income and the costs of raising children (how I hate that term – it’s like cattle) are high and also have attendant high health costs.

But the governments of the day trumpet the benefits of low interest rates which are helping the young working families but evade the truth of the deterioration of quality of life for the retiree cohort. I don’t know where the middle ground is and where all three cohorts can get a fair share.

Perhaps I should have studied economics instead of defence and strategic studies, politics and history.

What’s Your opinion?


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Low interest rates not fair for all
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dungfungus 8:29 am 13 May 15

rubaiyat said :

The All Ords is now back to February 2007 levels.

What has that got to do with interest rates?

rubaiyat 10:31 pm 12 May 15

The All Ords is now back to February 2007 levels.

rubaiyat 1:52 pm 12 May 15

Garfield said :

In addition to the All Ords you also need to factor in dividends which are another 4-6% p.a. on top of the index. The people who lost with the GFC are those who bought into the share market in a big way in the 12 months before it hit, when it was over valued, and those who sold out in the 12 months after it hit, thus missing out on the inevitable rebound in prices.

The principles of smart investing are that you buy a little each year, you hold a diversified portfolio to minimise risk and you don’t try to time the market, which is akin to “scientific” gambling. I started an investment in 2012 with a small lump sum and have been adding to it each month since then. The rate of return has been in excess of 15% p.a. Retired people I know who started drawing a pension from super some years before the GFC hit have balances in their super now that are around the pre GFC level and they have been drawing pensions the whole time. I don’t have the time for a full dissertation on investment theory but anyone who was properly invested in the market before the GFC and didn’t panic sell hasn’t lost in a significant way, and the longer term higher returns of being invested in the market mean they will have more comfortable retirements than those invested in cash.

Regarding advisors, there are good ones out there. Firstly talk to independent advisors, not ones with conflicts of interest, ie any advisor locked into only recommending certain products. I would be very reluctant to go to a financial planner whose firm is owned by a financial product supplier. Secondly, meet with more than one and get a good understanding of their investment philosophies. Investors need to have a basic understanding of the markets they’re invested in or they’re likely to make the wrong decision when times get tough, and they’ll be the ones who lose out.

I am aware of how it is done.

The trouble is with the “Ifs”.

If you got into the market at the right time, of course you do well. Avoiding the crash or coming in after the crash, or being in so long before the crash you could take the hit, but not everyone was so lucky.

If you had reached the point of retirement at the wrong time, there is no further reinvestments to compensate. Don’t forget reinvestment only tops it up, the initial bad investment stays bad. You are effectively taking your loses on the bad investment and moving on to new investments if you can.

If you don’t get into the market now when the returns are not anywhere high enough and have a serious risk of becoming GFC mark II.

If your investment advisor is honest and tells you about his conflicts of interest. The most successful ones by definition don’t tell you that, also the trailing commissions have been sucking the life out of many people’s super and don’t get announced. Hint don’t use the ones wearing the balaclavas, they are stupid as well as dishonest. Use the one wearing the Armani suit and all the promises, who initially answers the phone.

If your investment advisor tells you who is employing him and for what reason. There is a reason the Banks have been making a mozza, and most people are being captured by the heavily promoted tame investors run by the banks and the larger institutions, who are bribed, sorry “receive commissions”, to get their recommendations.

If the government of the day listens to the concerns of investors rather than the financial advisors or large institutions. So who is making the big donations and employs the high priced lobbyists? Why it’s you!!

This has been a long term festering sore, along with the bleeding obvious problem of the initial lack of choice or consolidation of super, when Keating started the compulsory super system.

It is a huge pool of money, with management that is largely invisible to the owners of the money and has been a very tempting target for anyone who wants it for themselves. Which they have done, bleeding it off at multiple points.

I knew Ken Done, who I always thought was a very smart business man. He put his considerable life earnings into the hands of financial advisors with the instruction to get an adequate rate of return and to retain the capital. They reduced I think it was $26 million down to a couple of million and he was forced to take them to court. Not everyone is in that position but there were plenty of people who were taken to the cleaners by the Big Banks advisors, who were egged on by management.

The great thing about impoverished investors is that they end up fighting the people who took it off them and are using the superannuate’s money to fend off the superannuate trying to get it back. With luck, no-one ends up with the money except the lawyers.

Very Busy 11:55 am 12 May 15

rubaiyat said :

[

Telstra 3, one of the great “Mum and Dad investments”, still has not got back to the price of the float in 2006. NINE YEARS LATER.

WRONG

T3 which floated in November 2006 had an issue price of $3.60, payable in 2 instalments of $2.00 (October 2006) and $1.60 (May 2008). Investors who held their shares and paid both instalments also received bonus shares of 4% of the original allotment. This gives an average buy in price of $3.46.

Dividends paid on those shares now totals $2.40 fully franked.
Current share price is over $6.00.

Cost $3.46
Total Return $8.40 if sold now giving a profit of $4.94 per share. Annual profit of over 10%.

You may be getting confused with to T2 from 1999 with a float price of $7.40 but even that has turned out to be a reasonable investment for those who’ve held on. Total dividends paid is now $4.08 so total return if sold now would be over $10 not including the potential return of the $4.08 paid in dividends.

dungfungus 10:34 am 12 May 15

HiddenDragon said :

The very low official interest rates are a fine example of swings and roundabouts – some people gain, while other people lose – and the net benefit to the economy is looking increasingly marginal with every RBA cut.

Had the move to lower interest rates been tied to a requirement for our banks to phase down (preferably phase out) their high dependence on foreign borrowings, there could have been real benefits to our economy. It would have taken some of the pressure of the exchange rate (thus making our export focused businesses more competitive) and, most importantly, would have made our banks somewhat more secure and stable, and less dependent upon the Government guarantee.

In reality, the government guarantee is worthless.
We owe half a trillion dollars and face years of borrowing so if the banks fail how is the government going to honour the guarantee?
If interest rates get any lower the “rate for risk” equation will topple so people will withdraw their cash and squirrel it away or buy bullion and hold it physically.

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