Share markets are in turmoil as rampant inflation spreads throughout the world.
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As usual, I have been receiving a flood of emails asking whether this is the start of a major meltdown, and whether people should convert their money to cash and buy back when the market recovers.
I'm also getting questions about moving to gold or silver, or even to Bitcoin.
I'll talk about these options in detail in a minute, but first let's go back to fundamentals.
The undeniable fact is that nobody can consistently pick the top and the bottom of the market, and those who get out when the market is having a bad time end up missing the inevitable rebound when it happens.
It's also important to keep in mind that the current price of a share may not reflect the intrinsic value of that share. When you buy shares in a company, such as BHP or Woolworths or Commonwealth Bank, you are becoming a part-owner of that business.
Over the long haul there is no reason to believe they will not thrive.
Many investors buy gold as a hedge against inflation. Historically that has tended to be a valid strategy, but in the last few months gold prices have been dropping at the same time as inflation fears have intensified.
As far as I'm concerned, if you buy gold you are punting on a commodity.
I first wrote about Bitcoin in this column in October 2017, warning anybody thinking of buying bitcoin that it was a Ponzi scheme, and they were taking a punt on future price increases.
It was making big news then, because the price of one bitcoin had gone from $1000 to $20,000 in just a year.
Of course, that kind of spectacular rise attracts everybody who wants to jump on the bandwagon before it's too late.
My column attracted a flood of emails telling me that I had lost the plot, and was being trapped by my old-fashioned thinking. Some even claimed that Bitcoin would reach $200,000 and keep on going.
A year later it had dropped to $4,721. Then in April 2020 it started a spectacular rise that saw it reach $77,761 in April 2021 and $82,452 in November 2021. Since then it's been on a downward trend, and at date of writing one bitcoin was priced at $41,704.
Bitcoin was one of the first cryptocurrencies, and it has attracted hundreds of imitators.
The one making news right now is TerraUSD stable coin, which was designed to keep a constant one-to-one value with the US dollar - it has just plunged 73 per cent to a low of $0.27. In this way, fourteen billion American dollars have vanished.
One problem with all these cryptocurrency offerings is that they work in a completely unregulated environment, and have attracted a horde of scammers who will go to great lengths to take your money from you. Another is that no-one seems to understand them.
People claim they are a hedge against inflation, yet cryptos have been falling while inflation is rising.
Promoters flog them on the basis that they will provide diversification against falls in the share market, yet as events of the last few weeks have shown, cryptos have been falling even faster than the share market.
We may well have a nervous few months ahead of us, but the lesson history teaches us is that the index, having made a low, never fails to make a new high.
The secret of success in shares is to hang in there for the long term.
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Noel answers your money questions
Question
I am 75 and receive a full pension plus rent assistance. My son has asked me if I would like to be a beneficiary of his trust fund to the amount of $7000 per year, paid fortnightly.
Will this affect my pension? Will I have to pay tax? Will the new Super rules apply?
Answer
From the information given this would appear to be a distribution from a discretionary family trust, in which case it would certainly be counted as income by Centrelink for pension purposes, and also form part of your assessable income for tax purposes.
However, if it's simply a gift it should have no effect on your pension. Make sure you clarify what is happening with your son.
Question
I currently have $200,000 in cash (earning little interest) which I was going to use to put towards a renovation or purchase of a new house. However it won't be needed for 12-18 months.
Can I park this money into my partners offset account for the time being, so to significantly reduce interest payments, and redraw it out again when required?
Are there any tax or legal aspects I need to consider? The purpose of the loan was to buy the home in which we live and there is no interest of being claimed as a tax deduction.
Answer
I don't see any tax or legal aspects that could affect what you're planning given the interest on the loan is not tax-deductible now and the money is being channelled through an offset account.
It would be a different matter entirely if the interest was tax-deductible and the money was "parked" directly into the loan account. It would then be regarded as a permanent loan reduction with a consequent loss of tax deductibility.
Question
I have come across banks - mainly overseas bank subsidiaries in Australia - offering Fixed Term Deposits with interest rates around 4 per cent and offering such as totally secure investments (like normal bank term deposits). It bothers me that they can offer such interest rates, when other banks cannot - is there an explanation for this.
The institutions offering such rates include the Royal Bank of Canada in Australia and DBS - Development Bank of Singapore in Australia.
Answer
There is a saying in the financial world that if it sounds too good to be true it probably is. The banks you mention are highly reputable, but I can see no information about the high rates you mention on their genuine websites.
In fact, on the DBS website is a statement "scam alert - scammers are impersonating DBS Australia to lure victims with high yield investment opportunities such as a product called "DBS Australian enhanced yield fund." Don't fall for it.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noel@noelwhittaker.com.au.
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