Fundamental principles never change
THIS week is the 30th anniversary of my book Making Money Made Simple, which was launched in 1987 and has sold more than two million copies around the world. It's fascinating to look back 30 years and think about what Australia was like at that time.
Inflation was running at 8%, the cash rate was 11% and the standard variable rate on a housing loan was 15.5%.
That sounds astronomical today, but remember in 1987 the average Brisbane house cost $62,000, which was 2.6 times the average income of $24,000 a year. Today, at $500,000, the average house is equivalent to approximately six times the average full-time income of $80,000 a year.
The 1987 edition of the book had an example of a couple on the average wage who bought the average house and, using one wage to pay off the mortgage, were free of debt in five years. It's an indicator of the escalating cost of home ownership that using the same figures today, the average couple after 10 years has just reduced their mortgage to a level where it could be serviced on one income. And yet interest rates in 1987 were three times what they are now.
It does make me extremely concerned when I hear reports in the media that mortgage stress is the worst it has ever been. If that is the case when interest rates are at historic lows, imagine the chaos if there were substantial rises.
In the book, I pointed out that both shares and property, if carefully chosen, had potential for good capital gain: that certainly proved to be correct.
Thirty years ago the Australian All Ordinaries Index was 1765. Despite a series of crashes since then, the index has increased three-fold today to almost 6000.
But that does not take income into account. If you had invested $50,000 in January 1987 in a fund matching that index, and reinvested dividends, your portfolio would now be worth $625,000, a return of 9% per annum compound.
And, as long-time readers would know, I continually stress the importance of understanding compound interest. To put it simply, how much you have at the end of the investment period depends on both the rate of return and the length of time the investment program must be in place.
Yes, 30 years have passed and economic conditions are dramatically different. Nobody knows what they might be in another 30 years - what we do know is that fundamental principles never change. As always, follow the fundamentals, and success is virtually assured.
Noel Whittaker is the author of Making Money 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: firstname.lastname@example.org