Two weeks ago in this column I talked about the wisdom of our children following in our footsteps and committing themselves to a debt-funded gamble on the property market.
I spent 30 years as a slave to interest payments and I asked whether we should really encourage our children to do the same, whether the formula will work for them.
It worked for us, sort of, mostly because it was a forced saving, a discipline, but also because we were lucky, because for the 33 years before the global financial crisis the share market and the property market was underwritten by a previously unknown explosion in debt-funded asset appreciation, which, depending on which index you believe, delivered a compound growth of somewhere between 9 and 10 per cent in both share and property prices before dividends and inflation, the two of which just about cancel each other out in real terms.
The question now is whether those returns will continue and my contention is it is a gamble, a gamble our children need to think very hard about.
The All Ordinaries returned an annual compounding 11.7 per cent in the 33 years from 1974 to 2007, but in the 33 years before 1974, before the explosion in debt, the All Ordinaries index returned just 2.9 per cent a year. In other words, for leveraged investment to make any sense in the future the debt culture has to continue and the hot potato of asset price appreciation has to stay hot.
The risk of course is that it doesn’t and I despair at the concept of my 19-year-old daughter enriching someone else with her bad timing and good intentions and having to work for decades just to make good on the mistake with no value to show for it at the end.
It’s not much fun losing money you have, but it does matter if our children lose money they don’t have, and spend their lives paying for it; that’s a whole new level of long-term slavery and dissatisfaction I cannot imagine.
So what can the younger generation do to avoid getting trapped by our debt culture? What should I be telling my daughter? How do they progress without borrowing a lot of money and taking a gamble on asset prices continuing to do what they did and interest rates not going up?
Here are some ideas, and while there are no golden bullets, hopefully some of this provokes you to think outside the square of doing what we did, before it’s too late:
- Challenge your assumptions. And challenge the assumptions of older people who lived through the golden era of the debt boom. Their advice assumes the perpetuation of history but at these prices, it’s not guaranteed, it’s a gamble. Assumptions are the mother of all you know whats.
- Don’t borrow money. Simple. Debt means committing yourself to the power of compounding returns working against you. The opposite of all the Warren Buffett advice. Debt enslaves you, changes your risk profile and pushes you to accept a low-risk career. It subdues entrepreneurism, it restrains risk taking and it forces people to make compromises. Compromise guarantees mediocrity. Before you commit yourself to mediocrity, to paying someone else a compound return for 20 years, have a bloody good think about how you can do it differently.
- Plan to build wealth without buying assets. Most really wealthy people got there by building businesses. Why not attempt that now, without encumbrance, without the responsibility of debt, while you have the energy and the courage to step over the line. Step straight into the rat race instead, into a job, a mortgage, a family, and you lose that opportunity. Do it now.
- Invest in your career. The best investment in the whole world is not in shares, or property, it’s in yourself, your brain, your knowledge, your skills. Focus on that and you will create more wealth than any property market. Your earning capacity is the best long-term investment you can make.
- Value your state of mind above all else. Debt comes with more than an interest cost. Over long periods it can impair your psyche and it can do so on a daily basis. Your frame of mind has tremendous value and in the long term it is worth more than any asset. Don’t gamble with it, preserve it. Normal is great, but you’ll only realise that when things are not normal.
- Rent. There is not enough space to expand this subject but there is a body of work about the long-term benefits of renting versus property ownership, look it up.
The other option of course, and I hesitate to tell you this, is to sponge off the people who have the money for as long as you possibly can. You already know this of course but don’t abuse it. We don’t need the internet as much as you do and we’re the ones paying the bills.
Marcus Padley is the author of the stockmarket newsletter Marcus Today. For a free trial go to marcustoday.com.au