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Guest mSparks

Fat Profits Time Bomb Investments #1

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Guest mSparks
Time-bomb investment #1:

Buy-to-let property

The best time to buy property for investment is when house prices are low in real terms.

To work out whether prices are high or low, you need to look at interest rates. Over time, falling rates are the single most important factor pushing house prices up. So you want to buy ahead of what you hope will be a sustained period of low interest rates.

But that's not now. On 5th July the Bank of England raised interest rates again and in our view it is much more likely they will rise rather than fall in the near future. This is the best time to sell. The crash in the buy-to-let market looks like it has already begun. Soon the rush for the door will begin and it will be impossible to sell for a decent price.

At the beginning of 2005, interest rates were at 4.5% and most analysts thought they would fall further. And yet – as we at MoneyWeek predicted - halfway through 2007 they were raised to 5.75%. Now, once again, the majority are predicting that rates will stay flat or fall – but we think there’s every chance they’ll go still higher. And that’s bad news for the indebted UK consumer, and buy-to-let investors in particular.

Already, bankruptcies have never been higher, while home repossessions are at their highest level in five years – with buy-to-let properties accounting for half of those sold at auction. If interest rates go even slightly higher, many more amateur landlords will be unable to cover the shortfall between the cost of their mortgage and their rental income. Then they'll all sell at once.

The big mistake your financial adviser makes

But let me stop here and take a moment to explain the “big picture”. Because, frankly, our recommendations are worthless if we have the big picture wrong. Of course, many investment advisers don't even bother to think about the big picture. They were suckered into a serious error by recent history. As long as the banks made it easier and easier for people to get their hands on money, the big picture didn't seem to matter. The idea was merely to BUY!

So you bought shares, or property, or bonds, and the chances were very good that you would make money. So, analysts came to believe that there was no point in thinking about the big picture at all. “Just tell me what to buy,” they would say.

Unfortunately, there comes a time when they should sell most investments, not buy them.

Let me explain. Forgive me if I'm telling you more than you wanted to know, but this is important.

The origins of the 1980-2004 boom were rooted in a strange phenomenon that happened 9 years earlier. For on 15 August, 1971, the US had dropped any pretense of ever paying its debts in gold. From that day forward, dollar holders trusted in good faith and the good judgment of the Fed - and nothing more.

The US suddenly had a licence to print money - as much as it wanted. This sent catastrophic ripples across the Atlantic. In the UK, the banks lent money hand over fist. Inflation soared to 20%.

“You can't trust paper money,” said the crowd, and so they sold the dollar, shares, bonds, everything. The FTSE 30 index fell 70% between 1972 and 1974. House prices collapsed. The gilt market crashed. To protect themselves, investors bid up the price of gold to over $800 an ounce.

Thus was the stage set for a big surprise. Paul Volcker appeared on the scene in the US and clamped down hard on inflation. With interest rates up to 20%, he tightened the screws and the economy went into a slump. Americans were so angry they gathered on the Capitol steps and burnt Volcker in effigy. But Volcker's reforms held. The dollar stabilised. Inflation declined. And for the next 24 years, interest rates fell, until Alan Greenspan took them all the way down to 1% in 2002.

Why am I telling you all this?

Because when Wall Street sneezes, the City catches a cold. In the UK we are continually tied to the decisions made on Capitol Hill.

So I want you to understand that it was not a coincidence or a fluke that the FTSE shot up in the late '90s or that houses soared in the early 2000s. Both were a natural consequence of a world in which money - and the US dollar is the king of all the world's money - was becoming easier to get. Generally, when interest rates come down, shares and property prices go up. It's that simple.

And what happens when interest rates go up? Just the opposite.

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This advertisement to get people buying moneyweek is about 3 years old, just revamped.

err...

- halfway through 2007 they were raised to 5.75%.

...not quite! Although gold only spiked to $800 in 79-80 on the Iranian revolution. Max in 1974 was about $200.

Edit: Apologies just saw your "revamped" there.

Edited by yellerKat

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