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Friday, 27 March 2015

Household wealth hits record highs (the importance of buy and hold)

Time in the market!

Some skilled investors with a proven track record and finely honed money management skills are able to accelerate investment returns with adept market timing.

Most average investors either can't or don't achieve this.

The simplest way for most average investors to build wealth for their retirement is to continue to buy quality assets which they can hold onto forever - such as, for example, index funds, managed funds and well-located property - and then do so.

If markets do experience a slump, such as they did from 2008, then this can be an appropriate time to add further quality assets to your portfolio at mouth-watering prices when fear abounds.

This approach has some added benefits including minimising transaction costs and capital gains taxes, while shares and investment property in Australia are tax-advantaged assets in other respects too.

Instead of buying and selling, this approach to investment focuses on buying more quality assets and accordingly the rebalancing of a portfolio. 

Or timing the market?

For some people, there will also be an obstacle to investing, of course.

Since "fear sells" we have been hearing from some media outlets for years and years...and years...that the world is going to end and that we should be selling our homes, short-selling the banks, hoarding tins of spam, and whatever else.

This, in effect, is engaging in the "market timing" approach - that is, through waiting for the next inevitable market correction before taking any action.

In all markets corrections are inevitable, of course, the problem is that it is almost impossible for mere mortals to predict when they will come, although it always does seem uncannily easy in hindsight.

While share markets may appear to be highly unreliable and only move higher steadily over very long periods of time, this is in part illusory. 

The vital point of note is that over the years shareholders have continued to benefit from a bonanza of tax-advantaged dividends while "nervous nellies" who have continued to sit out of the market for years have not. 

Consequently, on an accumulation index basis Australian share indices continue to push record highs.

When the opportunity cost is measured over years, waiting it out can be a very expensive game.

Buy and hold for the long term?

While the superannuation industry has its many well--documented foibles, spruikers and ticket-clippers, the super system does serve one critical purpose for Australians in that it forces a high proportion of Aussies who might otherwise fail to do so to save and invest for their retirement using a long term focus.

The only thing that matters for you, of course, is that you have a workable financial plan for you, regardless of which asset class you prefer or strategy you take.

The ABS data showed yesterday that since the Q1 2009 nadir aggregate Australian household wealth has recovered very strongly by some a rollicking 54.4 per cent or some $2,777 billion to a new record high.

Household wealth to record highs

As the ABS released its Finance and Wealth data for the December 2014 quarter yesterday, let's take a brief look at what we can learn.

Firstly, in Q4 2014 household wealth increased by $189 billion or 2.5 percent to a new record high of $7,889 billion.

Total net worth was mainly made up of land and dwelling assets ($5,386 billion), financial assets ($3,961 billion), offset by household liabilities of $2,087 billion.

Cash and deposits are at all all-time high of $903 billion representing some 22.8 per cent of financial assets, which is now well above the decade average of 20 per cent.

Drivers of wealth gains

The increase in household wealth in the final quarter of the year was driven largely by holding gains in land and dwelling assets (+$101 billion) and financial assets (+$53 billion) as dwelling prices and share markets push higher.

Superannuation fund assets also increased by $53 billion in the final quarter as share markets recorded further gains.

Of course. with the population of Australia growing as I analysed here yesterday, we do expect aggregate household wealth to increase steadily over time. 

However, it is instructive to note that in per capita terms average Australian household wealth has bolted higher over the past 7 years or so to a new record of $333,000 as at Q4 2014, notching another solid increase of $6,800 in the final quarter of 2014.

Debt to assets ratio declines

The Finance and Wealth series has endless potential to imbue readers with chart fatigue, so I won't go down that path today.

However, before signing off it was pleasing to note that the ratio of household debt to total household assets has continued to decline to 20.7 percent, which is some way below the respective 2009 and 2011 peaks of close to 22 percent.

Just as importantly, mortgage serviceability has improved markedly since 2008 thanks to low interest and borrowing rates.

According to the ABS, the interest payable to income ratio has been in a "gradual downward trend" since the global financial crisis, now sitting at 10.4 percent, way down from above 16 percent at the ratio's peak.

The wrap

Market analysts expect household wealth to continue rising in the period ahead, with asset valuations being pushed upwards by low interest rates while cash and deposits holdings are expected to decline.

In particular, superannuation funds are expected to move some of their presently elevated cash holdings into the share markets.

Meanwhile dwelling prices are also rising in the three most populous cities, but are flat or declining in most other major conurbations.

Overall, this was a happy data release, with household wealth per capita breaking record highs and more gains expected.