Leaving money in the bank never made anybody rich, though no doubt it's handy once you get there. Yes, I know term deposits have served a treat they're government-guaranteed up to $250,000 and the 6 per cent return is better than most shares or properties have been doing.
But they're a foul-weather friend. Great when the going gets tough a drag in good times, because you could be in something doing better. Your capital can't grow and, in fact, shrinks, since what you don't lose in tax disappears in inflation.
Better to pay off the mortgage or invest. So let's look at where the money is likely to be made in the coming years.
The sharemarket is cheap. Did you know Wall Street, the epicentre of the global financial crisis, has surged to within 10 per cent of its all-time high? Our market, however, isn't in a bull's roar of its record. Despite a mining boom, it's done worse in the past six years than even most markets in Europe. How could that be?
Blame the dollar. It's made our market look expensive, putting off foreigners who, still shell-shocked, would sooner earn nothing on US government bonds than take their chances here, though they don't mind Australian bonds.
The dollar has been the final resting place
for many a brave forecast, but here goes. Although commodity prices peaked about a year ago it has been pumped up by our relatively high interest rates.
Fear, or perhaps it's greed, has so overwhelmed economic reality that the dollar is about 30 per cent over-valued on strict economic grounds.
Using a very conservative forecast of earnings-per-share growing 4 per cent annually for the next five years, Russell Investments' chief investment strategist, Andrew Pease, says the market should return 8.5 per cent a year.
It helps that the market is starting from a low point. In fact the price-to-earnings (P/E) ratio, which shows how long it takes to get your investment back, is only 11, well down on the more usual 13 to 15.
"The natural inclination was to love shares in 2007 when the market was way over the top and hate them now after five years of negative returns," Pease says. "But in five years time this will look different."
One straw in the wind is leading boutique fund manager and long-time bear Geoff Wilson, who runs Wilson Asset Management, becoming bullish. By his standards, that is. He's predicting a 5 per cent to 10 per cent rise in prices this year. His WAM Capital fund is invested 70 per cent in shares, 30 per cent cash, virtually a full circle from a year ago. How come?
The market became too pessimistic and there's a lot of cash out there waiting to be invested. The strange thing is that it's smaller stocks that may lead the market up. Traditionally the blue-chips are the leaders, but so far this year small industrial stocks have done more than the overall market.
"We're telling clients 2012 will be a very good year," Elio D'Amato, chief executive of research group and fund manager Lincoln, says. "But it will be in two halves. The first half will go sideways but the paradigm will change in the second half when investors will come flooding back."
As shares come out of the doldrums, property seems to be going into them. The average price nationally has been gently dropping for about 18 months.
There were 311,447 "for sale" signs in February, a jump of 23 per cent on a year ago, RP Data reports. Compared with household incomes or rental yields, property is over-valued. The question is how, and when, they'll get back to normal.
Since it would take a leap in unemployment or interest rates to trigger a crash,
it's more likely inflation, a rising population and time will chip away at the overvaluation. In any case, unlike the fallout of property booms in the US and Europe, Australia
has a shortage of housing, though perhaps not of listings.
"In the past prices have gone nowhere for an extended period of time," the managing director of property investment consultancy Atchison Consultants, Ken Atchison, says. "That's the way the market's corrected for being fully priced. So I'd expect very flat capital growth for a long time."
He predicts annual returns from investment properties of 7 per cent to 8 per cent, over half of which will come from rent rises. So like the sharemarket, go for a reliable income and let values look after themselves.
Among the capital cities Sydney, where the shortage is most pronounced, is likely to be the best performer, but only parts of it. Specifically the outer west and south-west where prices are low, producing high rental yields. "Investors should look at lower socio-economic areas where rents are 7 per cent or more gross," the principal of Smart Property Adviser, Kevin Lee, says. Properties in Gosford, north of Sydney, are yielding almost 9 per cent, he says.
Since property prices aren't likely to increase more than 2 per cent a year for the foreseeable future, forget negative gearing with an interest-only loan. Instead make sure the rental yield is more than the interest you're paying.
"Negative gearing with an interest-only loan is a risky strategy," he says. "It's hard to beat having a tenant pay off the loan for you. That's how you get equity."
Incidentally, the best yields are on units. Don't overlook commercial property, either. Incredibly, listed property trusts are trading below the values of their properties.
Government bonds beat the average share and property over the past five years, returning 7.65 per cent a year, according to S&P Indices. Shares fell 2.3 per cent a year and property rose 4.8 per cent. "Declining yields were a tailwind for bonds, which is why they produced out-sized returns," says Russell's Pease, who expects 4.5 per cent a year at best.
If you're investing less than $250,000, you'll get about 2 per cent a year more from a term deposit with the same guarantee of your money back.
Frankly, you'd need the economy to fall in a heap, when it's more the case we're coming out of one, so that rates drop another 2 per cent for bonds to appeal.
The strong dollar has turned us into international tourists but maybe we should be international investors as well.
It's a rare chance to invest in overseas assets cheaply and at some point there'll be bonus returns when it comes back down to earth again, either as our rates fall, US rates rise, or both happen. Emerging markets look good but their fate depends on China's economy - and where have you heard that before?
Still, "their debt is low, growth potential is very high, their dividends are attractive and their P/E multiples are slightly lower than Australia," the head of investment strategy at AMP Capital Investors, Shane Oliver, says.