When you come from nothing, the only way to catch up is to work harder than everyone else and use leverage.
If you can use other people’s money, with permission of course, and make correct assumptions about the future, you might build more with less.
But with current global events, it’s crucial to test your assumptions.
Elections, inflation, WW3, or climate change – how confident are you in your assumptions about the future?
Guessing the future is art more than science, and discernment’s required to filter imminent and inevitable. Yet, looking at the trends, like noticing interest rates trend downward over time while property prices rise, patterns emerge. After our home, we bought rental properties for about 8 years, then focused on a US share portfolio, precious metals, and bitcoin. Recently, it’s about paying down mortgage debt and building managed funds. As retirement approaches, we aim for certainty, and that involves questioning if current events will make our assumptions obsolete.
If my assumptions are correct, my confidence in our strategy should grow.
We prepare for multiple future realities and diversify our investments based on different assumptions. Property for the continuation of the status quo, tech-stocks and Bitcoin for a digital utopia, and gold for Armageddon.
For background, after the high interest rates of the 1980s, there’s been a trend of falling rates.
My assumption is this continues, but I test this regularly.
Central banks have reduced rates post-2020 inflation. In NZ, the OCR rose to 5.50%. Each cycle since the 80’s shows lower highs and lows in rates, suggesting a potential march to zero unless financial systems fundamentally change. Property in NZ is the base of the economy due to credit creation through lending against property.
Rising property values facilitate credit expansion and incentivise price bidding. Technology and innovation unlock wealth, reducing costs, but financial engineering reduces currency value, leading to asset price inflation.
I assume property prices must rise over the long term with our debt balance both in the private and public sector. However, if a 1970s scenario reoccurs, with multiple inflationary waves, my assumptions might need reevaluation.
Recent rate cuts by the Bank of Canada, ECB, and NZ’s OCR suggest a trend.
In NZ, lower rates might be justified with rising unemployment, unlike in the US where economic strength might delay rate cuts.
Higher US interest rates for longer might reduce the value of NZ’s currency and inject more inflationary pressures. As of November 2024, it appears as though the residential property market is picking up pace. First home buyers first, then investors (who compete for the same stock) and finally the upgrader will join in (from mid 2025). If I was to speculate further, the RBNZ might react slowly to the recession, potentially leading to even more significant rate drops. Dropping interests sucks money out of savings and term deposits into the next ‘safest’ (perceived) investment- property.
That’s a big assumption – now let’s test it by looking at not just the micro (NZ), but the macro (global) factors at play. Currently, global conflicts could impact property portfolios, potentially causing inflation (higher interest rates = bad for property values) or shifting economic priorities towards war efforts.
Thinking more medium to longer-term, post-conflict often brings new financial systems. This is why I feel it’s critical to learn about the money – what’s the point building up wealth when the type of money in the future is completely different?
Meanwhile, on the 5th of November, US election might influence global markets too, potentially leading to higher, sustained interest rates if inflation resurges based on politicians doing what politicians do.
If you’re portfolio is positioned for various futures possibilities, or you’re a passive investor, you need not ‘worry’ that global events will make you poor – you’re doing all you can already. Still, any solid investment strategy should be subjected to periods of testing to ensure a changing world doesn’t catch you off guard.
Using other peoples’ money (aka the bank), and undervalued assumptions (because the masses aren’t adopting them yet) can help create a result which is greater than what you could do on your own. Remember, leverage can amplify your investment outcomes in both directions!
