Bonds vs. HISA: some new insights

Value Collector said:

If we are talking about managing capital over a long time frame Eg 10+ years, good low/no debt income generating property can operate as a quasi inflation hedged bond.

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SirRumpole said:

AirBnB, short term tennants less likely to wreck the joint.

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Zaxon said:

And a much higher return, as long as it's in a tourist area. It still needs inspecting and cleaning though. Bring me the AirBnB REIT, and I'd be interested

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Zaxon said:

Property certainly can be a good investment. I feel, however, that buying an investment property is like having kids. It's a massive commitment. You need to have it tenanted, you're bound to get bad tenants at times, and then there's all those repair costs. Then you go to the tribunal to fight over the bond, and then you go grey...prematurely.

The civilized version of holding property is via a REIT. They're mostly office, warehouse, and retail, they're not really a drop in replacement for residential property. And REITs did badly in 2008. Mind you, physical property in the US did terribly in 2008. But I feel that REITs are more aligned with the share market than physical residential, so I don't know how much diversification they really add.

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Value Collector said:

I have said it a few times, but the rate setter platform is a decent place to store a portion of your cash.

In my opinion, it is safer than low interest government backed deposits, which are guaranteed to lose over time due to taxes and inflation.

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Buffetts number one rule is “don’t lose money” and that has become a cliche that is thrown around, in my opinion it is a very miss understood quote.

It leads people astray because they think they should be avoiding risk, when in reality it means preserve and grow your buying power.

In today’s climate, it’s impossible to preserve your buying power using government backed deposits, and silly to think you can grow your buying power using them.

You must take on some risk to achieve a satisfactory return, the key is to build a portfolio of assets, with varying attributes that as a group provide as steady return of growth and income through the cycle.

I believe platforms like rate setter can be part of such a balanced portfolio,

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SirRumpole said:

AirBnB, short term tennants less likely to wreck the joint.

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aus_trader said:

Thanks VC, but what about the credit default risk if there is a major downturn ? Wouldn't most of the loans given out by Rate Setter be at risk especially if individuals who borrow money lose jobs or companies that borrow money goes belly up ? I have looked into Rate Setter and some other P2P lenders before but this is the worry that I have. I know that rate setter is a little better than some of the others that I have come across due to having a "provision Fund" in case things go bad.

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Zaxon said:

Bring me the AirBnB REIT, and I'd be interested

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Value Collector said:

There is also a good amount of unlisted property investment trusts, also managing a small property portfolio is not as hard as poeople make out

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Zaxon said:

Any listed REITs that hold primarily residential properties?

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Value Collector said:

You can be diversified across hundreds of loans, and as you mentioned the provision fund is there to cover losses.

But let’s say for a year during a recession loan defaults sky rocket from the current 1.5% default rate to say 12%.

The provision fund would more than cover the first 6% of those defaults, that would leave you taking a 6% hit.

However, you have been earning 8% interest, so that 6% hit you take just reduced your take home return from 8% to 2%.

So in that bad year of 12% losses you just end up matching the return of today’s term deposits.

And if that bad year happens 1 out of 15 years, the 14 good years more than offset even a huge loss.

As I said it’s all about risk vs reward.

When you put your money into a Term Deposit, the bank is taking it and making similar loans to what ratesetter does, and keeping the margin for the shareholders and executive bonus, while you take the inflation hit and low income.

You don’t have to put all of your cash in Rate Setter, as I said it’s a good place to store a portion of it, along with a mixture of other assets.

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Zaxon said:

Any listed REITs that hold primarily residential properties?

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aus_trader said:

that's been on a downward slide for the last couple of years called US Masters Residential Property Fund (URF).

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BlindSquirrel said:

Now there's an ironic ticker!
That's the noise I'd be making if I'd been invested in it!

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aus_trader said:

Don't know how that fund works. If we were smack in the middle of GFC, I understand URF falling like that. But US residential property prices are fairly stable over the last couple of years, so the fund does not seem to reflect that.

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