“Cash flow is like oxygen; run out, and it’s over very quickly.”
If I haven’t heard my uncle, John Fitzgerald, say this to me a hundred times, it’s been a thousand.
How right he is, because it doesn’t matter how big your portfolio is, how high your returns are on paper or how good your long-term strategy looks, if the cash dries up – you’re done and could even go broke.
That’s why managing cash flow is the most critical part of managing risk. There are three key rules every investor should follow to keep their cash flow healthy (I’ll cover those in next week’s blog, so stay tuned).
As investors, we operate in three core modes: Plan, deliver and gamble
- We plan how to get from where we are to where we want to get to (the end goal).
- We deliver by taking action, one step at a time, propelling us closer to our end goal.
- We gamble because there is no such thing as risk-free investing, just managing those risks.
When it comes to the gamble, cash flow is the biggest risk we must manage. Run out and it’s game over (meaning we must sell investments or, heaven forbid, face bankruptcy).
We can never know what interest rates will do, and no one knows what the interest rate is going to be one year, two years or three years from now (if they say they do, don’t believe them).
What we can (and must) do is make informed decisions
Sometimes we need to be conservative – to protect our cash flow. Other times, we need to be bullish – to capitalise on opportunities.
I have to admit I’ve made my fair share of mistakes over the years. I’ve gone too hard when I should have pulled back, and I’ve been too conservative and missed out on an opportunity.
But right now I believe we’re heading into a window of opportunity, so I’m changing gears.
Here is the data I’m seeing that is jumping off the page and guiding me that way:
- Inflation: Now at 2.1% (or 2.4% if you strip out temporary government support). That’s within the RBA’s target band.
- Gross Domestic Product (GDP): Below 1%. Even lower – almost negative 1% – if you adjust for population growth.
- Household savings: At the lowest level in 15 years. Consumers are tapped out.
Interest rates have done their job – possibly too well. That’s why my money is on rates coming down. The only question is when, and by how much?
The fixed rate offerings, and how they compare against variable rates, are:
Rates examples for $650,000 loan at 80% LVR | ||
Loan type | Owner occupier | Investment |
Variable | 5.70% | 5.95% |
1-year fixed | 5.60% | 5.90% |
2-year fixed | 5.50% | 5.75% |
3-year fixed | 5.50% | 5.75% |
4-year fixed | 6.00% | 6.20% |
5-year fixed | 6.00% | 6.20% |
These fixed rates feel too high if we’re entering a rate-cutting cycle. If one-to-three-year fixed rates start with a four in front of them, it could be time to get aggressive and lock rates in.
The ground has shifted beneath us – we are entering a different interest rate environment, one that will put a tailwind behind the property market.
Time to switch from defensive mode
Don’t be asleep at the wheel. Pay attention and act accordingly.
