Cash, shares, real estate: where to invest in such volatile times

In the midst of a cost of living crunch, the thought of investing seems far beyond the reach of so many people

But for those who have been able to build up a cash nest egg, what to do with that investment is as confusing as it’s ever been.

Over the years, the three foundations of investment were cash, shares or real estate but these days we are flooded with other options. There’s cryptocurrency, property trusts, superannuation, managed funds and many more of what might be titled sophisticated investments. 

We live in a much more volatile world. We see that volatility in how the stock market, or in particular companies within the stock market, have been affected by Donald Trump’s tariffs, or how the RBA’s interest rate moves make cash more attractive or less attractive, or how real estate cycles can deliver huge capital gains or sit stagnant for years.

Most advisors would suggest a spread of your investment dollars through each of those categories, but for most people there just isn’t enough to spread. It then becomes critical to pick the best of those options.

The interest paid on cash too easily eroded by inflation and even then is taxed by government. The interest rate cycle is on a downward trajectory, making cash less and less appealing.

Understanding the stock market is an artform in itself.

The index is a continuous wave of ups and downs. Most financial advisors recommend a portion of relatively safe shares that have a somewhat stable return on investment, but rarely is there any significant upside in the medium term.

This should never be dismissed, depending on what stage of the financial lifecycle you are in.

Shares and safe bets

The stock market is very much aligned with the economy and in good times the stock market seems a nice road to be on, while in a slowing economy or recession, most investors are bitterly disappointed as they watch daily how their savings are eroded.

Often the stock’s value declines but, further compounding the issue, so too are the dividends sometimes suspended for lengthy periods. 

For most people under 40 years of age, they have only ever known a real estate market where there is greater demand than supply, which is why in the last 10 or more years the property market has shown such significant growth in values.

But it too can be subject to fluctuations as the economy goes through periods of strong and weak growth.

So what do you do now?

My experience has always been that speculative investment carries the highest risk of all. The more spectacular an opportunity looks, the more one should be wary.

Investing for me has always been about taking a balance between a safe bet and security.

With falling interest rates, cash in the bank holds little attraction although I would always want to have some for a rainy day.

Buying shares makes me nervous at present, given the volatility in the world economy off the back of moves by Trump. Being open about pursuing what is best for the US means it is at the expense of others and so we are likely to see continued turbulence.

Capital growth driven by undersupply

Real estate is close to my heart, but the reality is I have never seen it in such a strong position.

Nothing any government has done in the last 10 years has in any significant way addressed the issue of undersupply.

There is a shocking construction shortfall operating well below the volumes needed to meet population growth.

Every week demand outstrips supply by an increasing margin.

It will take a decade or more at best to not only meet current demands but to catch up on the significant backlog.

In plain economic terms, a greater demand than the supply means constant upward pressure on price.

For investors, this translates into gains from capital growth, while also offsetting borrowing costs through relatively high rental returns. This double bonus, capital growth plus income, reinforces the adage of property investment being ‘as safe as houses’.

All of the above are my observations through 50 years of being an avid investor but these views are also supported by the BRW Annual 500 Wealthiest Australians, where we repeatedly see that the most significant investment of the great majority of these high wealth Australians is held in real estate.

We look enviously at many of these people, feeling how lucky they are but for most it began with that first investment. It started with putting money aside weekly to get their first property and then again building a deposit for their second property. It seems painstakingly slow but it builds momentum.

As I look at the landscape today, it seems like a no-brainer to me.

Interest rates are falling, which makes money in the bank less attractive but more importantly, borrowing money more attractive.

The stock market needs a high degree of sophistication when it comes to research and invariably an element of luck. Investments can rapidly by 10 to 30 per cent without dividends. This is just too risky for me when the real estate market has been producing a lifetime of strong returns.

Ultimately, the worst decision is usually to do nothing at all.

Everyone needs a plan. Even if that plan cannot be acted upon immediately, we should know what path we are taking and working towards financial security in the years ahead.