Paying more for less catches people out

Paying more for less catches people out (Roger Montgomery)

Stock markets around the world are again registering all-time highs. The same is occurring here in Australia so investors should be celebrating.

But many are not.

And the reason for this is that investors are also economic citizens. A cursory economic glance at the country suggests all is not as well as the stock market’s strength might make it appear.

.......

A few months ago I had lunch with the Reserve Bank of Australia’s (RBA) Guy Debelle. At the time it was his hope that ATO tax rebates offered by the government would find their way into the stores. Instead the money went straight off mortgage balances.

Low interest rates, it seems, are not inspiring people to borrow more and spend – they already have more debt than they want.And they want less debt because low rates are signalling all is not well in the economy. And the stock market keeps registering new highs.

So what gives? The answer is in interest rates themselves. When rates fall, the present value of a future dollar is worth more.

When the RBA recently stated that rates could go to 0.25 per cent, and beyond that the bank would consider printing money, investors realised that painfully low earnings on term deposits were here to stay.

Consequently, the migration from bank term deposits to virtually anything else that makes more money, continued. Much of that migration is heading into stocks and so the stock market goes up.

But there are dangers to the migration.Most investors make the mistake of chasing the stocks with the highest yields. This can be a mistake.

...Continues