Lessons for Australian Investors
From the subprime mortgage crisis in the US: With investment markets still shaken by the credit meltdown in the sub-prime mortgage sector in the United States, now is a good time to spend some time looking at exactly where your money is invested.
Owning a portfolio of investments that are diversified and managed by experts is fundamental to investment success. Decisions about buying, selling and holding are challenging enough in the best of times, let alone when a subprime crisis in the US is starting to ripple through Australia’s markets hanging the way we look at risk.
Above all else it is important to keep things in context. Australia does not have the sub-prime mortgage problem the US does, this type of lending, which to date has been very common in the US, is rare in Australia. In broad terms, thesub-prime mortgage crisis came about after vast numbers of mortgages were granted to people unable to afford them. The only way people could afford these loans was through discounted introductory rates (or honeymoon rates) where the interest rate doubles two to three years into the term of the loan. It is at the end of the honeymoon period that people run into trouble and can’t fund the increasing repayments. This then forces the lender to sell the property and recover the amount owing plus any unpaid interest.
Adding more fuel to the fire, a large percentage of these sub-prime loans were packaged into investments and sold by banks and other financialinstitutions as “structured” or “securitised” lending products. These are the products that have caused Merrill Lynch and Citigroup to write off tens of billions of dollars after it came to light that the properties used as security were dropping in value and worth less than the loans written over them. These events have rightly changed people’s attitude to risk and this is now playing out on a global scale as consumers and businesses take stock, exercise greater caution and reduce their spending.
These issues serve as a timely reminder that risk comes with a price. Share markets rise and fall and after a prolonged period of steady economic growth we are entering a period of greater uncertainty. For investors it is not time to panic. However, the recent issues in the US emphasizes the importance in the value of good financial advice. A good financial adviser will regularly review your portfolio’s diversification and check the value of your holdings in the main investment classes: Australian shares, international shares, property, fixed interest and cash. He or she will also check that the percentage you have in each investment class, is appropriate to your age, personal circumstances and when you need to access your investment.