Noel Whittaker's Blog It’s 10 years since the GFC hit. Today let’s reflect on the lessons we have learned from the biggest crisis in most of our lifetimes.
You may be surprised to learn that the interest rates in Australia were on the rise in early 2008, with the Reserve Bank raising interest rates twice in February and March 2008 by 25 basis points to take the cash rate to 7.25%. The banks followed suit and by late 2008 the standard variable rate had reached 9.3%.
The Reserve Bank did not start dropping rates until September 2008, with a first reduction of 25 basis points. Reductions continued until August 2016 when the cash rate bottomed at 1.5%.
In August 2008 the average home loan balance was $270,000, requiring repayments of $2332 a month on a 25-year term at 9.3%. When the GFC hit I urged readers to maintain their current payments if at all possible, to give themselves a safety buffer.
Anybody who followed that advice would now be laughing. They should owe just $28,000 on their housing loan and will have it paid off 15 years faster than if they had reduced their repayments as interest rates fell. The interest saved is close to $300,000. The first lesson? When things get tough, just stay on track.
There have been many stories in the media about people who lost their life savings when the GFC hit, and were burnt so badly that they have never invested in any asset class apart from cash since that date.
But history shows that cashing out was a very bad decision. Think about a person who had $300,000 in a share portfolio that matched the All Ordinaries Accumulation Index, which includes income as well as growth. If they had left their portfolio untouched it would have dropped to $258,000 within 12 months of the GFC – a loss of 14%. But by hanging in there that portfolio would now be worth $567,000, a return of 6.6% per annum over the last 10 years.
The big question now is: where to from here? Certainly, the world is in an interesting place, with hundreds of trillions of dollars of debt to be washed out of the system. But I have long believed that if you take control of those factors which are in your control, you will be okay in the long run. If you follow the basics, such as keeping your spending under control and having a well-diversified portfolio, you should be able to face the future with optimism.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au