January 27, 2022 by Dymphna

Why this strategy sucks in a market like this

Markets are in a flap, but my advice to these investors is to stay calm.

The whole economy is a bit schizophrenic right now hey?

In some ways, it’s an incredibly challenging time. Omicron is putting strain on the health system, the CBDs are still ghost towns, and supply chains are all kinked up.

And then in markets, the wheels seem to be coming off, as people freak out about inflation and geo-political risks.

But then again, the Aussie economy, on the all the data we have, is looking pretty strong. Consumer sentiment held up in January, and in Westpac’s words, was “surprisingly solid.”

This is a surprisingly solid result given the rapid spread of the omicron COVID variant over the last month. The 2% decline compares to the 5.2% drop seen in the first month of the delta outbreak in NSW, a 6.1% drop heading into Victoria’s ‘second wave’ outbreak in 2020 and the epic 17.7% collapse when the pandemic first hit in early 2020.

Maybe this is just what ‘learning to live with Covid’ looks like.

Spending is also holding up, hovering around the 2021 average:

And then, as I covered off on Monday, the jobs data is thumping, with unemployment down to the lowest level in 13 years.

And so it’s the best of times, it’s the worst of times.

Ultimately, I’m very bullish in my outlook. The storm-clouds we see largely seem to be temporary to me, and when you look through the noise, the underlying pictures is of an economy rapidly rebounding, riding a tidal wave of free money.

Let’s not lose sight of that. That’s important.

But I think it is a challenging time for negative gearing.

I’m generally not a fan of negative gearing. How it ever became a ‘fad’ in Australian investing is beyond me.

(I think accountants have a lot to answer for.)

And so it’s never something I recommend to my students. I mean sure, sometimes you have to pay to hang on to a property while you manufacture growth through a subdivision or something like that.

But buy and hold and lose money is never a way to make money in the long run.

(Gosh, it sounds so stupid when you say it like that.)

But I think it’s very hard in a time like this.

And often it’s just about the pressure. When you’ve got a negatively geared property, you become highly dependent on your income.

If you lose your income – if you get sick, or your industry starts to struggle as a lot of industries will over the next couple of months – that negatively geared property becomes a mill-stone around your neck.

And so you look at a market like this – that’s sending all sorts of mixed messages, and has the doom-merchants working themselves into a tizzy – you look at a market like this and it’s hard not to get nervous.

And look, there’s enough to get stressed about already. Modern life is highly stressful as it is.

There’s no need to add a loss-making property into that mix.

So yeah, negative gearing. Avoid it if you can.

But if you are negatively geared, take a soothing word from me. The underlying fundamentals are strong.

We might have a rough couple of months, but we’ll ride through it ok.