1% further interest rate cut - what that means for YOU

December 2nd, 2008  |  Posted in General

The Reserve Bank has just cut interest rates by a further 1% to take the official rate to 4.25%. That brings us back to the low in the last cycle at December 2001.

These dramatic cuts are evidence that the RBA is aggressively seeking to improve consumer sentiment and stimulate the economy. Pressure will again be on all the Banks to pass on the total reduction – which so far, at least two of them have said they'll do

Another step in the right direction

Today's rate cuts and the roll out of next week's $10 billion stimulus package are bricks in the wall of rebuilding consumer sentiment and confidence.

Over the next 6 months there will be ups and downs as different pieces of economic news is absorbed by the markets. As lower interest rates and the fiscal stimulus package begin to take effect in the economy, volatility will decrease and sentiment will change. Whilst we don't expect huge increases in the markets back to 2007 prices over the next 12 months, we could expect to see the top companies stabilize and begin to trade at more normal Price Earnings and Yield levels. (This is why we believe the ASX20+ offer could be suitable for many investors.)

When we see stability returning in the markets and our currency, the large Super funds and investment funds that move the markets (both Australian and Overseas) will begin to venture back in – this will have a further strengthening effect. By then many people will be pleased they kept on investing through the turbulence, and that's exactly what I hope you're able to do

Why? Because…

A little discipline now could mean BIG rewards later

The banks will pass on something of this reduction (the Commonwealth Bank and National Australia Bank have already announced that they will pass on the full 1% and Westpac will pass on 0.8%) and whilst this won't fix things overnight, it may give some investors a chance to make hay while the sun shines.

Today's announcement means that a household with a variable rate loan of $300,000 will be saving a further $250.00 a month. This is not the time to spend up big for Christmas or splurge on large ticket items. By now (since the rate cuts began in September), you should have an extra $750 each month. Whilst you may find it too tight to use all these funds, it is a mistake to take up all the slack with frivolous spending or bad debt now. Instead, this is a serious chance to get ahead. Save. Reduce debt and Invest.

Could this be the break you need to get ahead?

These cuts make for an excellent opportunity to establish a cash buffer if you don't already have one, reduce debt, or invest. And don't delay – if you do it now, you will miss it less and will be more likely to be able to continue with an ongoing plan.

Remember, this is money you've been finding each month already. If you can be disciplined enough to continue to go without it, you could make a lot of headway over the next few years.

Take the reins and control your future

The key to successful long term wealth creation is consistent investing over time.

It is a mistake not to continue to invest when the market is falling and rising (especially if you stay out of the market now) because you lose the opportunity to reduce the average cost per unit or share you hold – placing your future into the hands of lady luck in trying to select the perfect days to buy and sell.

Don't fool yourself. Attempting to time the market, especially with such volatility, is risky business. Anyone who considers themselves conservative and risk-averse (in fact I believe EVERYONE) should rely on time in the market and consistent, regular investing to build their wealth. Timing is for traders and even they frequently get it wrong.

In trying to time the market, there is a risk you will miss the boat all together and there may be many false alarms over the coming 12 months while we experience all this volatility. Snapping up value when you see it and setting your investments when there are genuine “discounts” is a far more reliable way to invest.

NOW is the time to dramatically reduce the cost of your portfolio and substantially decrease the amount the market needs to recover in order for you to be ahead again!

NOW is the time that serious money can be made.

If you invest (even small amounts) consistently, all the time, you too can take advantage of this strategy.

Call 1800 000 369 to talk to one of our Advisers today to see how YOU could make the most of these interest rate cuts.

When the world wakes up, you'll be in front

Today's interest rate reductions plus the fiscal stimulus already announced by the Government may take some time to flow into the economy. And it is generally accepted that the RBA may cut rates again in early 2009 in order to make a noticeable impact on consumer sentiment.

Even so, right now, we all have an excellent opportunity to stick with the strategy. Put any surplus money you may have to good use and take control of your future and your fortune. One day people will wake up and once again decide to get on with a prosperous new cycle.

The best you can do today is make sure you're well positioned when that day comes.

Have an Adviser call me to discuss this further.

Cheers,

Peter Spann