Low interest rates that are unlikely to increase any time soon and property as well as equity markets that are growing strongly, both in Australia and overseas, create the basis for gearing up and taking high levels of risk. People ask me – as an economist – how it will all end. I confidently predict it will end in tears with many people losing everything and margin calls driving asset prices to levels where those few smarties with plenty of cash will make a killing. This matters a lot for older people who are either retired or about to retire and for whom a 20-year wait for market values to be restored would be a disastrous possible outcome.
What I don’t know is when the disaster will impact. Selling out now might leave investors missing good gains. My best advice however is to cut back gearing and not to overextend. Indeed holding a fair bit in cash or short-term bonds makes sense – even if, as Christopher Joye points out, after-tax returns on these assets are negative at present. The fear is that if another crash occurs soon it will be a doozy. Of course I may be wrong or suggesting precaution too early in which case investors will forego gain. There are no guarantees despite what the spivs currently flogging red hot property deals all over town are suggesting – indeed their raucous noises make me less confident about the future rather than more. But this strategy does provide insurance against a real possible asset market meltdown short-term.
Please don’t take any of this as financial advice but don’t consult your paid financial advisor either. I don’t know but they don’t know either and, like Socrates, I am superior at least to the extent that I know I don’t know.