Q: Can you talk more about some uncertainties that are happening at the moment, like rising interest rates, government changes, the economic world, and others? What can you say about people giving predictions out there?

• We talked about how predictions are formed. Some people use data to formulate predictions. Some people have theories and then go and find the data that supports those theories. Some people just makeup predictions and then speak with authority. 
• Unfortunately, the reality is that the loudest voices get the most airtime, and everyone is a guru, with the benefit of hindsight.
• We talked a lot about studies that have been done that verify out of 25,000 professionals that try to predict who gets it right. They found that it was just all completely random. 
• The point is that if we don’t know where things are going, the best we can do is look at where we are.
• Then make decisions based on the information in front of us rather than trying to predict things with absolute certainty.

Q: Can you give an overview of what we’ve seen in the market? 

• This was one of the hardest events I’ve ever had to prepare for.
• It’s like opening many cans of worms and trying to digest dozens of videos, articles, and opinions. It was super hard. 
• Ultimately, I had to throw it all out, step back, and think, “What do our tribe need to know right now?” 
• If I have to give you a few things that are real right now, the first is that the expenses of governments are way bigger than their revenues. 
• I think government debts are bigger than their assets and growing. 
• I think the government looks wealthy, but they’re pretty weak because they’re spending so much. 
• Number four was, I think, we’ve got the largest military conflict since World War II that’s happening right now. 
• Things with the supply chain and inflation are accelerating. Unfortunately, they’re not getting any better. 
• The commodity and share markets are already showing huge volatility, the supply chain is limping, and growth is slowing. 
• The bottom line is I think consumers and investors are nervous.

Q: What do you think we must prepare for with an uncertain economy?

• I’m not trying to be a doomsayer and say that everything will turn into crap, but if you look back over history, I would say that just because we’ve never experienced something in our lives doesn’t mean it hasn’t happened before. 
• To some degree, in the financial market, history is the study of surprises. People are pretty good at predicting what’s predictable, but they’re not good at predicting the surprises, like COVID.
• Given what’s happening in the market now, I think it’s prudent to be cautious about your actions. 
• I’m always huge on tidying up the house from a financial point of view. So make sure you clean the house. Make sure you understand what’s performing and what’s not. Make sure you understand the prospects of every investment that you have, and make sure you’re tracking it.
• People get a bit lazy about those things when we’re in a buoyant market where you can’t put a foot wrong. 
• They postpone difficult decisions. They maybe turn a blind eye to underperforming investments that they’re carrying.
• Now, more than any time in the recent past is the time for you not to be ignoring your housekeeping around your wealth.
• Give it some attention because if you don’t and something adverse happens, you can be in a lot of pain.

Q: With turbulent times coming ahead, what other things should we consider in our preparation?  

• When times are good, people feel bad about sitting on large sums of cash because they feel like they should be jumping on a deal in the market.
• Holding too much cash feels like a lost opportunity cost. But the flip side is that cash can be the ultimate insurance policy, even with inflation and everything going on. 
• Holding a little more cash than usual and looking at your debt-to-value ratios is probably prudent. 
• There are a lot of people who have taken advantage of more relaxed lending practices over the last couple of years.
• Investment advisors will often teach you to maximise borrowings and refinance at every opportunity to buy more property. 
• Where you are on your investment journey makes a big difference about these things. 
• If you’re like someone like me and you’ve got the benefit of 20-plus years of investing behind you, it’s not going to make a huge difference if the market took a haircut and dropped 20%.
• Whereas if you’re recently getting into investing, and the market tanked or dropped significantly, that could hurt you. 
• That’s why it’s important to recognise where you are on your journey. 
• I know there are people loaded up with four to six investment properties in the last two years, and they feel good about it because they’ve made significant equity gains during that time. 
• But they’re also on a knife’s edge. If the market were to drop, not only would they lose those, but they could also put themselves under massive cashflow stress.
• We talked a little bit about people’s experiences during the Great Depression. 
• It almost didn’t matter how much capital you had. How people got by was cash and cash reserves. 
• That’s why self-sustaining investments or investments that deliver strong, predictable cash flows are important.

Q: Can you talk about a good case study you shared with us about this couple who got a great portfolio size? What will happen to them during these turbulent times? 

• You’ve got to make the hard decisions now, while your head is clear and you’ve got the time to take action.
• You must question how much cash you should keep and look at your leverage. 
• When times are good, you can get away with carrying some dogs in your portfolio, underperformance, or even assets with negative equity because you don’t have to address it. 
• Now is the time to look at those and say, “Yes, I might take a small haircut if I realised that loss or get rid of that dog, but it reduces the pressure on me and stabilises my position massively.” 
• In my lifetime, everything, including the global financial crisis, was a blip in terms of its impact on the Australian economy. 
• If anything, it created vast opportunities in the alternative space. But in terms of the Australian property portfolio, it flatlined a tiny bit, but still, nothing much happened. 
• So in my life, nothing catastrophic from a financial perspective has happened. But I don’t fool myself into thinking that it can’t happen. 
• I am totally against predicting what will happen but is there a chance that something pretty serious could happen to this couple?
• Rajan and Polly are a couple who owned a large portfolio of properties in two-bedroom units in Melbourne and Sydney.
• Their portfolio is worth about 19.2 million, had a debt of about 14 million, and were on an average interest rate of about 2.48%. 
• Their net rent was $63,000 positive. They’re in the black, but they were forced to pay additional principal repayments of $144,000 a year, taking them into the red.
• They had a fantastic business income of just over half a million, but their lifestyle expenses were $400,000 to $450,000, and their cash reserves were only about $110,000. 
• In the context of everything we’re talking about, it becomes immediately apparent that there’s some vulnerability because they’ve got a reasonable amount of leverage and very little cash flow. They’re already carrying negative cash-flowing property, even though it’s in the black as far as technically. 
• Something I’ve heard people talk about across the board is the banks are becoming more conservative, forcing people into higher and higher principal repayments. 
• So even where you’ve negotiated a great interest rate, if your principal repayments are high, that can scorch your cash flow fast. 
• Even though it’s forced savings to pay down debt, it still can hurt during a tough period, especially if something happens to their business and they can’t earn that money anymore. 
• We don’t have a lot of transparency here, but how quickly could they scale back their living expenses from $450,000 down to maybe half that?
• On the surface, they have an enviable property portfolio and are doing well. 
• But as we looked back at some case studies for people around the Great Depression, which I think is the nearest equivalent of a massive fracture to the economy, some people were minting money, which just evaporated. 
• They were left in a situation where they didn’t have the resources behind them to back it up. 
• At the beginning of COVID in March of 2020, the whole world got a taster of the fear of what it could be like if everything turned to custard.
• There was about a month when everyone was panic-stricken. 
• It was just a taster, and we hoped the government would always come to the rescue.
• But we can’t hang our hats on that. We don’t necessarily know that that will happen.
• We are not financial advisors. There is no advice. Please don’t run out and do anything rash. 
• I think the big takeaway that I wanted to drive home is to ask yourself if there are any difficult decisions you need to make about your wealth. If there are, do them now.

Q: Can you share another case study from the other end of the spectrum compared to the one we discussed earlier?

• Janine and Mike had a more modest six investment properties worth about 4 million, and they had two underperforming properties for various reasons. 
• One was being rented by a family member, costing them about $20,000 a year to cover the interest. 
• It was about to revert from a 1.98% fixed rate to a 3.5% variable. 
• Then the second was they had a few properties in a mining town at its peak.
• It was doing well, but now they’re worth two-thirds as much, bringing in negative cash flow. 
• To sell them would be to realise a loss of $150,000 but would free up about $300,000 in cash.
• Their current cash reserves are less than $35,000, and they both have $2,000 per week of discretionary spending outside their bills. 
• This particular couple doesn’t have a lot of cash reserves. They’ve held on to these properties that haven’t performed. 
• As someone who supports many people in wealth, I don’t think it’s ever my job to be prescriptive. 
• They can’t do much about the property that the mom is in because that’s family, and they want to keep supporting her.
• But having an extra $300 in cash, realising that loss, and using it in the future could be a sensible decision.
• Their cash reserves being as low as they are a bit of a red flag.

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