Golden Rules for Investing When Interest Rates Are Low
With the falling interest rates in the economy, the rules shielding investment of money are also changing. It is, however a matter of concern that this has led to increasing debt which in any way is not the solution. It was only recently that Treasurer Joe Hockey was criticised gravely for his remark ‘now is the time to borrow and invest’ given the marginal increase in the rate of borrowing. AMP Capital, investment strategy head said that even though the term deposits were at their lowest level and despite them being constant, people should refrain from following Joe Hockey’s strategy. Presently, 2.5% is the interest paid on deposits and meanwhile share prices of the big banks have slumped 12-14%, paying twice as much income though it is likely to fall as quickly.
As rightly exclaimed by the Principal of Wealth for Life Financial Planning Rex Whitford, ‘people should invest in assets they understand and not be lured by investments promising high income returns’. For some of the many investors, borrowing at the present rate might work due to the rate of tax deduction allowed for investment loans which can bring the rate below 3%.
The Principal of Bourke Shaw Financial Services has very wisely suggested that the issue of investing and borrowing should be determined by your goals, investment time frame and the present stage of your life while keeping tax advantages as a secondary issue.
You must previously work out what exactly it is that you want. Are you after a high income or Capital stability? If it is capital stability then shares are definitely not the best thing for you.
The Golden Rules
- To be able to pay off your debts is your best investment and low interest rates can be of a great assistance in this regard.
- It is very important that you know your tolerance level for any risk you take. AMP Capital head says ‘If you are moving out of bank deposits you’re taking more risk’
- Make certain that you do not keep all your money under one casket and you spread it across different types of assets to reduce the overall risk.
- You need to master the art of squeezing every dollar out of bank deposits by shopping and switching banks when required.
- Flexibility should be your mantra. Don’t lock up anything for more than a year because the interest rates will go up at some stage.
- Aim to own such investments that are of advantage to you, which pay you more than they cost you. Negative gearing might be a popular tool, but it also means that you’re losing money.
- Income paid by your investments should be sustainable.
- It is recommended to seek professional advice and guidance.
- Borrowing money for investment is a double edged sword where it could either magnify gains or it could magnify losses. Beware of the risks.
- Low interest rates are proportion with low inflation, so don’t gamble to keep up with living costs.