I don’t normally do articles like this. But because 2020 was so bizarre, I feel like it makes sense to take stock of our options in 2021.
Ideally, things will be heading back towards some type of ‘normal’ this year and you’ll have regular savings to invest.
So let’s take a look at the different places to invest in 2021. I’ll share my thoughts on each as well as what my plans are this year.
Note: I’m not making predictions here, nor am I telling you what to do. These are just ideas and commentary!
Interest rates are on the floor
Let’s start with the obvious. Interest rates are extremely low around the world. This affects a lot of different things. From the cost of a mortgage, to what we can earn in a savings account, and the value of other assets like shares and property.
Now of course, you should always have some type of cash buffer or emergency fund in place, just in case. Either to cover against job loss, unexpected expenses, or as a buffer in retirement.
But with interest rates so low, a bank account is about the last place we want to be piling up our long-term money.
Paying off debt
This topic always divides people.
Should you take advantage of low interest rates by paying off debt faster? Or should you take advantage of low interest rates by investing as much as possible while debt repayments are cheap?
I fall in the second camp. Well, mostly. I think there are cases where focusing on paying down debt makes more sense. It really depends on your situation, risk tolerance, and personal goals.
And to clarify, here I’m talking about low rate mortgage debt. If you have any personal loans, car loans, or credit card debt, get rid of that ASAP before focusing on anything else.
By all means, if you find paying down debt the most motivating option, then do it. And honestly, most people I talk to in real life are best suited to paying off their mortgage. Not because it has the best return, but because that return is guaranteed, they love seeing the balance come down, and eventually, it makes life easier.
If you’re not sure what suits you best, check out this post: Paying Off Your Mortgage vs Investing.
Investing in shares
Despite the pandemic, most sharemarkets did okay in 2020. Here are the returns for the most common investment options…
Depending on who you are, you either think the sharemarket is now way overvalued, or you think it looks okay compared to other options.
I fall in the latter camp. While you can never rule out a large fall, it looks like company earnings should recover pretty well in the next couple of years (maybe even quickly surpassing the levels before the pandemic).
In my view, there’s no (realistic) reason to believe we’re in for a long drawn out recession-like period. Governments have never responded to a downturn the way they have this time. And they’ll adjust the flow of their spending tap depending on the economy.
As for investing in shares, the strategy of dollar cost averaging – buying shares every single month – is simple yet so powerful.
If the market is flat or goes up, you’re accumulating shares and getting wealthier. And if the market goes down, you’re buying more and more shares for the same amount of dollars invested (which increases your future return).
For the amount of effort required (zero), I can’t think of a more effective approach to building a portfolio than dollar-cost averaging.
Going forward? I still expect shares to have solid long term returns, despite the hiccups along the way. This remains my asset class of choice for passive income and building wealth.
Investing in property
Aussie Property also held up well in 2020, partly thanks to banks offering mortgage deferrals. While this might’ve seemed like a ticking time bomb at first, most of these people have now commenced their normal repayments.
All up, it doesn’t look like there’ll be the much-hoped-for property crash anytime soon. Here’s how prices fared across the cities, according to CoreLogic data in this article.
Combined capitals: 2%
Combined regionals: 6.9%
Regular readers will know I’m a much bigger fan of shares than property. That’s despite having invested heavily in residential property in the past.
Having said that, the numbers have changed a bit since the huge drop in mortgage rates. Property in Australia is nearly always a leveraged bet on price growth. But the cashflow side of things has improved, resulting in ‘cashflow neutral’ property in many cases. I may flesh this out further in a future article.
Going forward? The outlook for property in many states is surprisingly good. The number of properties for sale is low, vacancy rates have fallen, interest rates are even lower, and we value our homes more than ever thanks to the pandemic. A year or two of growth would be nice as we look to sell another property sometime in 2022.
Investing in alternative options…
People have been asking for my thoughts on crypto recently. Probably because it’s gone up about 1,000,000% so it seems like a great place to park some cash.
The truth is, I don’t have much to say (though we are covering ‘Other Asset Classes’ in an upcoming podcast). Investing in crypto, for me, isn’t investing at all.
Whether bitcoin goes to the moon or crashes in the next few years, I have zero interest in buying any. None. For the same reason I have no interest in gold, rare art and vintage cars.
My strategy is to buy assets which will produce cashflow for as long as I own them. And importantly, that cashflow is built on fundamentals like earnings and profit growth. Crypto and the other assets I mentioned are largely a popularity story, requiring belief and popularity for it to gain traction, with more people bidding up the price.
“But stocks move up and down based on popularity too,” you say? That’s true. But if my investments never have capital growth, I’ll still get a healthy long term return.
Why? Because the income stream will keep rolling in, from the various businesses and real estate, and it will keep getting larger as earnings and rents grow over time. So I don’t have to care about its popularity.
This is a newer type of investment that I’ve been involved in for a number of years now. I can only really comment on one platform – Plenti (formerly Ratesetter) – because it’s the only one I’ve used.
If you’re unaware, it’s an online platform where you can lend your savings out for 1 month to 7 years. The platform organises the loan to match a creditworthy borrower and you receive principal and interest repayments each month. You essentially become a bank.
If you want a proper rundown of how it all works, I wrote an article about it here. Interest rates vary widely depending on the P2P platform and the risk of the borrowers. I’m still earning a rate of about 8% for loans I setup a few years ago. These days, the 5 year lending rates are around 6% per annum.
While not without its risks, this new platform interested me from the start, and it’s been simple and enjoyable to invest with.
Timing the market
Since the recovery in shares began as the pandemic was at its worst, we’ve heard endless calls for stock markets to collapse again. Mind you, these are often the same people who were saying “the worst is yet to come” when the market was already down 35%.
Honestly, there have been so many doomsday calls over the last couple of years that it’s now downright boring to hear. Bad news gets these miserable people frothing at the mouth since they’re actively betting against the human race. I’m sure they’re great fun to be around!
I won’t rattle on too much here, but listening to forecasts and trying to time the market has proven to be such a waste of time. I wrote in depth about it in this article.
The line “don’t invest now!” is constantly peddled as a way to ‘protect your wealth’. When, ironically, more often than not, this has made people poorer than if they had just continued to invest normally.
I’ve heard stories like this from a number of readers, being seduced by this waiting game before finally realising they should’ve just stuck with their long term regular investing plan.
Picking your own stocks seems to rise and fall in popularity depending on what’s happening. If you pick the right stocks, you can do incredibly well. But if you don’t, you can also do pretty poorly, leaving you feeling like you just wasted energy, time and money.
You might pick the next Tesla or Afterpay. Or you might get burned when the company falls into trouble, runs out of cash, or turns out to be nothing more than hype and promises.
Having said that, it does depend on what your approach is. Buying BHP won’t change your life, but it also won’t go out of business anytime soon.
Generally, I wouldn’t recommend stock picking to try and generate huge returns, purely because it’s so difficult. Plus, the records show that only a small percentage of companies become huge long term winners. And to be clear, it’s not obvious which companies these are in advance!
But if you have to scratch this particular itch, to try it for yourself or simply for fun, do it with a small amount of your portfolio. Just make sure the rest of your investments are low cost and well diversified.
What I’m doing and why
The longer I invest the more convinced I am that the best investments strategies are the simplest.
Not only because it’s easier. But because it gives you mental space and energy to focus on other things. It also minimises mistakes, since a more complex approach means more decisions, which increases the chance of making a poor choice.
I’m sticking with buying and holding long term assets which generate earnings that compound over time. Maybe I’ve got the investing brain of a boring old man, but that’s what makes sense to me.
There’s no need to chase every shiny object, anything with potential. Being jealous or envious of those with high returns (due to luck or skill) is a sure road to misery and terrible investment decisions.
2021 is shaping up to be an interesting year. There are more uncertainties than normal. But that doesn’t mean we shouldn’t invest.
I’m still optimistic on the long term future of Australia and the global economy. You almost have to be. Imagine being negative about the future of society and the economy. How miserable would life be?!
If anybody tells you they know how this year is going to play out, they’re delusional. The one thing we should’ve learned from 2020 is that even though we crave certainty, we can’t have it.
Will we get hit by new virus strains? How will the vaccine rollout go? Should we expect a strong or slow economic recovery? Will households spend up big or get cautious? Should governments hand out more cash or keep winding back?
All I can tell you is this: Stick to your plan and work on your personal goals. This gives you a sense of purpose and clarity in a confusing world.
And of course, focus on saving and increasing your investments. After all, that’s the only way to make sure you keep progressing towards financial independence!
So, where will you be investing in 2021? Let me know in the comments below…
And in case you haven’t heard, there’s now a Strong Money Australia Facebook page (only took three-and-a-half years!)