Five phrases to fear

The most important thing is to protect your capital:

How often have we heard this phrase? It is understandable that most of us want to protect our capital but as we know only too well that highly secure investments such as bank accounts and term deposits are unlikely to provide the returns that we need to meet our goals in retirement.

Especially after tax and inflation there is usually very little left for us to enjoy in retirement.

Somewhere there is a balance between the risks that we need to take to provide the returns that we desire. In recent years the inflation rate in Australia has been low.

However, most of us remember the times when inflation in Australia has run into double-digit figures. At these times the return that we need to make each year is at least the rate of inflation and preferably more than that.

These days getting a return of inflation plus more is a little easier. However, we also need to remember that lower rates of return are now the norm and we need to accept that this will be the case into the future.

This time, things are different:

Market fundamentals do not change. So long as the market reacts to factors in the economy we will always be in the realm of rising and falling markets. Sharemarkets rise and sharemarkets fall. Never expect that markets will always rise. In 1987, we received a warning that economic conditions dictate the position of markets.

Theories that markets always move in predetermined cycles are laughable at best. The decisions made by Reserve Banks and Central Banks a world apart from us can have an impact on us here. Never forget that conditions determine the market and never get complacent about the economy.

You can’t go wrong in bricks and mortar:

This would have to be one of the most often heard statements made in Australia. Houses can lose value. Ask anyone who bought one just before the GST was introduced here in Australia. Go back to the 1990s and ask those people who struggled through almost 10 years of low-price rises.

The most important thing is to diversify your portfolio. Never have all of your eggs in the one basket of property. Property can rise and it can fall in value. There are times when the property market is the place to be and times when it is not. Low-inflation times are not good for property markets. We are seeing that now with price rises being ordinary at best at present.

It’s got amazing tax advantages:

Every June I warn readers to this column that those projects that seem to surface around that time have to be treated with a great deal of caution.

Macadamia plantations, ostrich farms and pine plantations sold on the basis of the huge tax advantages that they offered have to treated with appropriate derision.

When you decide to invest in a project purely for the tax advantages, then you can be assured that one of the groups that will be examining the project carefully will be the ATO.

Last year, the ATO issued 12,000 assessments disallowing the deductions claimed by investors in the Budplan investments as well as a variety of films.

This came as no surprise to me as we had warned that this was going to be the case at some date in the future.

Again, we can do little more than reiterate our warning that these projects need to be viewed with caution.

Even the presence of a Tax Office ruling does not preclude the ATO from later disallowing a deduction if they are not convinced that the project has followed its plan to the letter of the law.

If you don’t buy now, it will be too late:

The herd mentality is one of the most interesting phenomenons to observe. Usually, when the herd is getting into the market, it is time for you to be bailing out.

So when everyone tries to convince you that the time is now for you to be involving yourself in the investment area, then it is time to take stock and find out exactly what the investment is going to cost and what returns you are likely to get from it.

The “bottom line” issue for all investments is exactly the same. What the investment costs and what returns you get from it are vital issues that you need to assess.

Never allow these considerations to be clouded by smooth-talking experts who tell you “if you don’t buy now, it will be too late”.

Remember these rules and you should be able to have an investment that will perform. The main thing to remember is to diversify your portfolio and get the best returns for yourself.

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