COVER STORY

Where to invest $10k: expert picks

Go for defence, not attack, as the market boom reaches its peak. It’s a matter of when. As the stockmarket boom has progressed, my history or my age is catching up with me. Though, unlike the cryptocurrency boom last year, there has not been a “but this time it’s different” moment in the stockmarket. Not yet, anyhow.

But just as inflated prices and questionable underlying assets caught up with cryptocurrency investors in a big hurry, so too will the inflated valuations on many Australian companies catch up with them.

FUTURE SHOCKS

You might also make a parallel with house prices in the major capital cities. The price increases (which average 70% from trough to peak in Sydney and more than 50% in Melbourne) eventually meant a first home buyer had to save more than $100,000 as a deposit and then to shell out 40% of their net income to manage the mortgage. The speculation in houses was aided and abetted by international buyers and owners of self-managed superannuation funds, which for the first time were capable of borrowing to buy property.

As the valuations increased and worries about first home buyers grew, the regulatory response to limit foreign buyers and to limit credit to investors were all that was needed to bring down valuations.

Consider also what Labor’s plan to change negative gearing and capital gains tax might do to the housing markets – if it is elected. This is the classic example of a policy created in one set of economic circumstances that may be implemented at an entirely different time.

The real problem for me right now is that the stockmarket boom seems mature, both here and in the US. It’s worth considering the statement from the Reserve Bank governor Philip Lowe’s 2018-19 corporate plan: “Over 2018-19 to 2021-22, the structure of the Australian economy will continue to evolve and economic shocks – which, by definition, are not forecastable – will occur. Movements in asset values and leverage may be more important for economic developments than in the past given the already high levels of debt on household balance sheets. The high debt levels could complicate future monetary policy decisions by making the economy less resilient to shocks.”

Hear that? Economic shocks will occur … next four years … movements in asset values will affect household balance sheets because of high debts … it will make it tough for the Reserve Bank and the federal government to respond. Do you have your portfolio and investments ready for that?

Twelve months ago the strategy was to buy cyclical stocks: media, transport, logistics and the like. And that’s been successful, aided by a renewed tailwind for resources and mining services. The profits and good times might not be over for these stocks quite yet but increasing valuations make profit targets harder to achieve and any slips will be punished hard on the stockmarket.

GO FOR GOLD

The strategy for now is to become more defensive. More gold stocks: think Evolution Mining, Northern Star (which has had a recent run), St Barbara and even Regis. Pick the eyes out of these companies. Take profits from the companies you have had the best runs in, even if you leave a few behind in case the timing is not quite right. Pay down margin loans and keep your debts under control.

The problem in making big calls such as this is that you might be wrong for quite some time. That can dilute your wealth or performance while you’re awaiting a downturn. The timing of the call is as important as the call itself.

But history tells us that time eventually catches up with all bull markets. This time will be no different.