Investopoly

Calendar year to date, the stock and bond markets have produced some of the worst returns on record, which is unusual because bonds and stocks are typically negatively correlated. In fact, this has only happened two times over the past 96 years, as illustrated in this chart. Even gold, commodities and property have lost value this year. It’s really been a horrible market for investment returns. I discuss the key risks that have driven markets lower below, as well as highlighting the investment opportunities that exist as a result. How high will interest rates rise and for how long? I think the biggest factor that is creating the most uncertainty is what the terminal cash rate may be i.e., how high will central banks have to raise rates to reduce inflation. I don’t think the market will begin any sustainable recovery until the terminal cash rate becomes clear and ascertainable.If the terminal cash rate turns out to be lower than what the market has priced in, then it is possible that markets could rebound strongly. In Australia, the market has priced in a terminal cash rate of 4.0%, so it’s entirely possible that the market has over-sold, since no economists expect the RBA to raise rates by another 1.40%. For example, the big 4 banks forecast the terminal cash rate to be 3.1-3.6% which is an increase by another 0.5% to 1.0% over the coming 6 to 9 months. In the US, its equivalent cash rate is currently set at 3.00-3.25% and the market is expecting a terminal rate of between 4.5-5.0%, so it seems the US Fed Reserve has a lot more work to do than the RBA does in Australia. My point is that until we see successive data that confirms inflation has begun returning to normal levels, the market cannot accurately price in an accurate terminal cash rate. Will there be a recession? If so, how deep? In response to rising inflation, central banks have hiked interest rates faster that anytime in history. Normally, when a central bank wants to tighten monetary policy, it does so less aggressively so that it can measure the impact that higher rates is having on the economy. This more measured approach allows central bankers to adjust their approach to ensure it doesn’t raise rates too far and cause a recession i.e., slow economic growth too much. Given most economic data lags by two to three months, central banks are really flying blind at the moment. My new book out in mid-2026: To join the pre-order waitlist and get a bonus. More info go to: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at questions@investopoly.com.au. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

The very first article that I wrote for a magazine was published 19 years ago! No wonder I feel old. The article was called ‘Unlimited finance…’. My thesis was that investing in high yield properties, doesn’t magically extend ones borrowing capacity allowing them to invest a lot more.  Some investors believe targeting high rental yielding investment properties will allow them to borrow a lot more and therefore buy more properties. And the more property they hold, the more wealth they accumulate, or so their theory goes. However, the truth is that borrowing capacity isn’t that sensitive to rental yields.  How much does rental yield affect borrowing capacity I wrote a blog last week highlighting that borrowing capacity is probably the tightest that it’s been in 20 years. The reason is that lenders must add a benchmark interest rate of 3% on top of the actual rate you will pay to ensure you can afford a loan, should interest rates rise further.  Banks will also base their affordability on principal and interest repayments over a 25-year loan term. As such, the benchmark repayments for a $1 million investment loan will be $93,000. Consequently, for an investment property to be borrowing capacity neutral, it must generate a gross rental yield of over 13%, as most lenders shave off 20-30% of rental income to allow for expenses.  Obviously, there aren’t a lot of residential properties yielding more than 13%. As such, even higher yielding investments (e.g., 4-6% p.a.) eat into an investors borrowing capacity.  Lower yielding properties reduce your borrowing capacity by 25% I spoke to an investor recently that had invested in 3 properties. The aggregate value of these properties was $1.2 million, and the portfolio had $1 million of debt. The gross rental yield across the portfolio was around 5.2% p.a. This investor thought targeting high yielding properties would allow him to borrow more and buy more properties.  It is true that higher yielding properties do increase your borrowing capacity. Let’s look at an example. I assumed each spouse earns $100k p.a. gross, an outstanding home loan of $350k, spend $5,500 per month on living expenses and have a credit card with a $5k limit. Based on these assumptions, I calculated their borrowing capacity as follows: If they achieve a gross rental yield of 5.5%, they can invest $1 million in property. If they achieve a grMy new book out in mid-2026: To join the pre-order waitlist and get a bonus. More info go to: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at questions@investopoly.com.au. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

Borrowing capacity has probably never been tighter in the 20 years since I started ProSolution! This is delaying investment plans for some clients. However, my expectation is that this is temporary and an easing in borrowing capacity might not be too far away.  How borrowing capacity rules have changed over recent years In 2019, the banking regulator, APRA told banks to include a ‘serviceability buffer’ of at least 2.5% above the actual interest rate to test borrowing capacity. In October 2021, it increased this to a minimum of 3%, when actual interest rates were circa 2% p.a. Therefore, if you are applying for a home loan today, your repayments will be tested at a rate of around 7.55% p.a. P&I over 30 years. Interest-only investment loan applications are tested at an interest rate of circa 8.35% p.a. on a P&I basis over 25 years. This means benchmark repayments for a $1 million home loan would be $84k p.a. (compared to $61k p.a. for actual repayments), and almost $95k p.a. for an interest-only investment loan (compared to $54k p.a. for actual repayments). Therefore, benchmark repayments are now over 80% higher than actual repayments for interest-only investment loans. To give you some context, benchmark interest rates over the past 20 years have typically ranged between 6% and 7% p.a. It is probably unnecessary for benchmark interest rates to exceed circa 7% p.a. on a permanent basis. Rising interest rates reduces your borrowing capacity The issue is that the RBA has hiked rates so quickly i.e., 2.50% over the past 6 months and the banking regulator hasn’t adjusted its benchmark interest rate guidance accordingly. The 3% p.a. buffer was prudent when the cash rate was only 0.10% p.a. but arguably excessive now. For example, a borrower needs to demonstrate they have over $62,000 of surplus income to qualify for a $1 million investment loan to buy an investment property: ·      Rental income @ 3% of property’s value shaded by 70% to allow for expenses = $20,000·      Less P&I repayments on $1m @ 8.35% over 25 years = $95,450·      Add back negative gearing tax benefit = $13,000·      Cash surplus required = $62,450 (which equates to an income surplus of $100k p.a. before tax)The RBA would like to see lending volumes fall It is noteworthy that new home loan volumes have been unsustainably high over the past two years, as illustrated in the chart below. New investment home loan volumes have been above average too, but not to the same extent as home loans. This increase in volume was no dMy new book out in mid-2026: To join the pre-order waitlist and get a bonus. More info go to: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at questions@investopoly.com.au. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

One of the most interesting things I do is meet many investors every week (i.e., prospective clients). It is something that I have been doing regularly for almost 20 years, so I’ve literally spoken to thousands of investors. It is interesting because it provides me with the opportunity to reflect on peoples past investment decisions with the benefit of hindsight. There are some common themes. People tend to make one of a handful of mistakes. I think past mistakes provide very valuable learnings. Mistakes are predictable from the outsetI believe that all financial “mistakes” are completely avoidable. Virtually no financial mistakes (i.e., losses or underperformance) occur because of random bad luck. They are avoidable if you follow an evidence-based approach. For example, if your share investing methodology involves buying highly speculative stocks, then you only have yourself to blame if you don’t make any money after several years, because the evidence shows that speculation has a very low probability of generating reasonable returns over the long run.  Therefore, based on my 20 years of experience, if you commit one of the mistakes below, there’s a very high probability that you’ll end up with a dud investment. Conversely, if you avoid all these mistakes, you maximise your chances of success. I must remind readers that I am completely independent. We do not buy property on behalf of clients, so I have no vested interest in you following the below advice. I am merely sharing what I have observed over the past two decades.  (1) Buyers’ agents buying outside of their domicile State It is becoming more common for buyers’ agents to buy property interstate for clients. For example, a Sydney-based buyers’ agent might buy property in Brisbane. In my view, this is a no-no. One of the most important things I hope to benefit from when engaging the services of a buyers’ agent is their experience. I know that selecting the right property is part-art and part-science. The science part incudes all the objective considerations such as past growth, location, land size, land value, zoning/restrictions and so on. The objective assessment is driven mostly by data and a lot of this data is now available for a small cost online. I probably don’t need to pay a professional to collate such data. However, the art part of selecting a property is obsoletely critical. It requires local area knowledge. Things like, one side of a particularMy new book out in mid-2026: To join the pre-order waitlist and get a bonus. More info go to: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at questions@investopoly.com.au. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

An investment property’s total investment return will consist of rental income plus capital growth. I have written about the importance of maximising capital growth many times. However, often investors are tempted to focus attention on income (when selecting an investment property) too, as they seek to minimise the cash flow cost of holding the investment property. I propose that this is a mistake with a high opportunity cost. The reason investors make this mistake could be due to (1) not fully appreciating the consequences of their decision, (2) need to adjust their target property attributes or (3) need to reduce their investment budget. Focusing on income means you must spend more on the building value The value of a property consists of two components being the land plus any improvements i.e., the dwelling. Generally, land appreciates in value whereas buildings depreciate over time due to wear and tear, which I have written about here.My new book out in mid-2026: To join the pre-order waitlist and get a bonus. More info go to: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at questions@investopoly.com.au. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

Often people wonder whether they should be doing more with their cash savings other than leaving them in a savings account. This blog discusses some options and highlights some considerations with each option. Of course, the information contained in this blog is not personalised advice as it cannot consider your unique situation and goals. As such, you should always consider obtaining personal independent financial advice before making any financial decisions. Maintain a buffer equal to 6 to 12 months of living expensesI typically counsel my clients to hold between 6 and 12 months of living expenses in cash savings in case of emergencies. If your income or expenses can be volatile, you should probably hold 12 (or more) months. Therefore, the options discussed below apply to any cash savings you may hold in excess of this buffer amount. Contribute into superYou can contribute savings into super either through making concessional (up to an annual cap of $27,500 per person) and/or non-concessional (annual cap is $110,000) contributions. The benefits of moving savings inside super are twofold. Firstly, it’s a low-tax environment where investment earnings are taxed at a flat rate of 15% and capital gains at only 10%. If you are a high-income earner, it will save tax. Secondly, it will be automatically invested for you in line with your selected investment option e.g., balanced, growth, etc., so it’s a very simple, hands-off way to invest your savings. The downside to contributing money into super is that you cannot access it until you are older than 60[1] and retired (or 65 if you are still working). Whether this is a potential problem depends on (1) how close you are to being able to access super if you need it and (2) the likelihood of needing to access these monies e.g., if you have plenty of financial resources outside of super, then the likelihood is probably low.   If you are going to move your savings into super, please make sure that your super fund is performing well. Invest in hybrid securities A hybrid security is a type of investment that combines bond and share (equity) characteristics. It usually pays a monthly income, like a bond (via a dividend payment). These dividends typically have imputation (franking/tax) credits attached to tMy new book out in mid-2026: To join the pre-order waitlist and get a bonus. More info go to: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at questions@investopoly.com.au. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

I wrote a blog in May warning investors to prepare for lots of bad news, uncertainty and market volatility. My thesis was that rising inflation, supply chain issues and rising rates would cause economic pain. Unfortunately, my prediction was correct, and we should expect the volatility to continue for many more months to come. It is possible that all you may see are risks and problems at the moment. But in 5 years from now, it is likely you’ll look back and see lots of (missed) opportunities because the rear vision mirror is always clearer than the windscreen. I’d like to share four rules which can help guide you to make great investment decisions over the course of the next year, and the rest of your life. Missing the best days of the market is a good lesson and a perfect metaphorThere are lots of charts that demonstrate that if you miss the 10 best days in the share market over a long period of time (say 10 years), it will have a dramatic negative impact on your overall investment returns i.e., you will earn half the returns or less. This chart is a good example. The lesson is that no one can pick the best days and the worst days. Therefore, if you sell your investments because you are concerned about volatility, you will inevitably miss the best days (best returns) and your overall performance will suffer. Another way to look at it is, that the best returns come in the years following a stock market decline. The chart below, which covers almost one century of data, illustrates this very eloquently (produced by Dimensional).   CHARTThis concept applies to all markets and asset classes including residential property. Understand that volatility is normalThe event or issue that causes volatility (i.e., market uncertainty) is always unique and unpredictable. An event must be unpredictable to cause the market to fall dramatically because predictable events/issues are already systematically reflected in share prices. Volatility is normal and it should be expected. Volatility is a very important part of price discovery which ensures the market adequately reflects risks and opportunities. VolatilitMy new book out in mid-2026: To join the pre-order waitlist and get a bonus. More info go to: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at questions@investopoly.com.au. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

A Goldilocks investment strategy means that you are making the most of your financial opportunities without overdoing it and taking unnecessary risk. That is, your level of investing is exactly right (i.e., perfectly balanced).  Underinvesting means that you risk not having enough investment assets to enjoy a comfortable retirement.  Overinvesting means that you have taken unacceptable risks which may compromise your ability to achieve a comfortable retirement.  The goal is to achieve a perfect balance – invest enough to ensure you will meet your lifestyle goals – but not too much that you put your lifestyle goals at risk.  Overinvesting can do a lot of harm I recall working with a mortgage broking client (not financial planning) for several years prior to 2008. The client purchased 6 investment-grade properties over a relatively short period. After the sixth acquisition, I advised the client to not purchase anymore properties, as I felt taking on more debt would be too risky. The client ignored my advice and purchased two more investment properties – which I only found out about after the fact!  Unfortunately, the GFC hit Australian shores in 2008/2009 and the RBA cash rate climbed to 7.25% which put pressure on the client’s cash flow. Worse still, credit rules and policies were rightfully tightened which locked this client out of their ability to refinance. The client had no choice other than to sell all but two of their properties in the years following 2010 because they wanted to retire.  This client’s story is a perfect cautionary tale. Debt is a wonderful servant, but a terrible master. Borrowing to invest can be a very powerful and beneficial strategy but it must be used carefully. You must never borrow more than you can afford and should consider your ability to service repayments when interest rates rise. For example, what if you are forced to eventually repay principal and interest. Or due to borrowing capacity, you can’t refinance e.g., you are trapped at your current lender. You must consider these risks.   Underinvesting comes with great opportunity cost Arguably, underinvesting is just as bad as overinvesting. Underinvesting means that you risk not accumulating sufficient investment assets to achieve your lifestyle goals i.e., funding a comfortable retirement.  I wrote a blog earlier this year (here) setting out the three common reasons that tend to cause people to underinvest. It’s worth reading if you suspect that you have underinvested. My new book out in mid-2026: To join the pre-order waitlist and get a bonus. More info go to: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at questions@investopoly.com.au. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

 Commentators often refer to the price of property in Australia relative to household incomes. They highlight that property prices have risen two to three times faster than household incomes. They conclude that property growth cannot exceed income growth perpetually.  Obviously, this is unsustainable at a macro level. I’ve written about the factors that contributed to property price growth over the past few decades here. But many of these factors won’t repeat themselves over future decades. However, I argue that this commentary isn’t relevant to investors if they invest in investment-grade property. My thesis is that if you invest in locations that attract the wealthiest 20% of Australians, it is likely you will enjoy an above average capital growth rate. Wealth inequality is a terrible phenomenonWealth inequality means that the rich get richer, and the poor get poorer in a real and relative sense. It makes escaping poverty more difficult. It robs people of equal opportunities. It’s a terrible phenomenon. The chart below demonstrates how significant wealth inequality is in Australia. The wealthiest 20% of Australian’s own more than 73% of the total personal wealth in Australia – the 80/20 rule at play.  CHARTIt would be lovely to think that Australia will create greater wealth equality in the future, but unfortunately, I don’t think it’s likely. In fact, wealth inequality is likely to get worse, not better. Unfortunately, Covid exacerbated it as higher income earners were typically able to work from home. Rising interest rates and inflation are much less of a concern to wealthier and/or higher income earners.  All these things make wealth inequality worse. Therefore, when making investment decisions, it’s prudent and advisable to assume that wealth inequality will continue. If it does, its likely property price growth rates in blue-chip locations which attract the wealthiest Australians, will materially exceed outer suburbs.  Is there a relationship between average suburb owners’ income and capital growth?The theory is that if you invest in suburbs where the occupants earn above average incomes (based on census data or similar), then those suburbs will experience higher rates of growth because occupants can afford to pay more. Whilst this sounds logical, in reality, income data is hard to measure accurately, and it's only one componMy new book out in mid-2026: To join the pre-order waitlist and get a bonus. More info go to: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at questions@investopoly.com.au. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

I believe that most people have a very similar tolerance for investment risk.  Most people are comfortable achieving a long-term annual return of 7% to 10% if the risk of losing money is very low. In short, I think most people have a low appetite for risk – they prefer to take as little risk as possible and invest in a “sure thing” if the return will be enough for them to meet their goals. What is a risk profileRisk is the probability of not achieving your targeted investment returns. This might happen in two ways. Firstly, the investment might end up being a dud with little prospects of ever delivering the returns you desire i.e., an investment mistake. Secondly, you might not achieve your returns temporarily, due to intermittent volatility. For example, if you invested in the Australian share market in May 2021, your return just over one year later is zero, as over that time, the market risen, fallen, and subsequently recovered back to May 2021 levels (ignoring dividend income). But this volatility is almost certainly temporary. We know that over multiyear periods (e.g., a decade or longer), the market has always trended higher. Most people are only concerned by the first risk because they know volatility is normal and are happy to endure it if they will be rewarded adequately in the long run. That said, some people, albeit a minority, have a low tolerance for intermittent volatility. How do you measure your risk profile The traditional way to measure risk tolerance is by asking a series of hypothetical questions to measure your comfort/discomfort with experiencing volatility and investment losses. This questionnaire is a good example, which we use in our practice (it’s based on this paper). However, I am skeptical that these questionnaires provide reliable information. It’s one thing to predict how you’d feel if your investments fell by 30% of value, but until your experience it, you don’t know for sure. We know that humans have a strong cognitive bias for loss aversion – the pain of losing is psychologically twice as powerful as the pleasure of gaining. 95% of people have the same profile I describe most people’s risk tolerance below (including my own): I work hard for my money, so I don’t want to take high risks and risk losing it. I’d be happy to generate a long-term investment return of 7-10% p.aMy new book out in mid-2026: To join the pre-order waitlist and get a bonus. More info go to: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at questions@investopoly.com.au. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.