Hello and welcome to Girls at Invest. You're joined today by your host, Simon Meyer, two millennial investors, who are here to help you learn about all things investing and personal finance. Hello, Maya. Kilda, Simon, we have not recorded in person in a while. Months. Months. So many months that we went to record and I didn't even know how to turn on the thing. Yeah. We both like looked at each other. And I was like, where's your podcast equipment? I was missing equipment and I was like, I don't bring equipment when I come in person. And Simon's like,
I was like, no, I'm sure was forgotten the process. Well, we're here. It has been a while, but I'm excited to chat to you today because we are talking about real estate and bonds and what is more attractive.
I can think of a few things that's a little bit more attractive than that, but I will say it's an interesting topic. Like, I'm looking forward to hearing about it. Are you? Yeah. Genuinely. Well, your eyes are pretty big right now, so I believe you. You are making intense eye contact. You're not shuffling, like, shifting. I'm not like, yeah, you know, I'm really interested. Well, the reason?
talking about this today is because in 2024, the Central European Bank has cut interest rates for the second time in three months. This is like when your friend is like, guys, I'm going to break up with them. But then they like aren't really sure. But then the next month, they're like, no, guys, I'm actually going to do it. If she says she's going to break up with her boyfriend three months in a row,
You're like, oh my God, we're getting there. We're getting there. We're getting closer. Okay. The time between her saying that is getting shorter and shorter. We're on our way. But so are the interest rates actually getting cut? Or are they just kind of threatening us with it? They are getting cut. Okay. And so they are getting cut, but
every single month for the last three months in a row. It's not like they're getting together, then they're breaking out, then they're getting together. It's not like they're cutting interest rates, and then they go up again, and they cut them, and they go back again. Consistency. This is a tract of, so... I can do that for you. Yeah.
Now it's gone down three months in a row and this has been reinforced by the expectation that the US Federal Reserve, so these are the guys or girls that are like, hey, we're going to decide if interest rates in the US go up and down to determine if inflation's going to go up and down. Like they're in control of inflation. So they do have all of the big power boards and switches.
They're called Fed Daddy in some circles. Oh, OK, I see, I see in our circle. And so basically they think the US is going to do the same thing. And now the financial markets are basically saying, OK, yes, we anticipate that the Fed will cut rates by at least 25 base points in the upcoming meeting. But
Now that interest rates have begun to drop around the world, should you be investing more? Are they a good thing? Will investments go up and should we change what we're doing? So I want to know, are the interest rates cut a good thing? Interest rate cuts
are a good thing in the same way that, how do I explain this? If you decide that you want to buy a house and you're like, OK, I want to purchase a home, Maya, you and I, we're going to buy a place together. And we go to a bank and we're like, OK, we have $100,000 between us, saved up. We want to purchase a property. They're like, awesome, you have the deposit. But the interest rate to get a mortgage is 6%, or 7%.
That's high. That is really high. And so that might be like 50% or even more of our salaries. And that's like, who wants to have a house where all of your money is going to the house? Yeah, it's not feasible to do that. Because then your friends will be like, hey, do you want to hang out? And you're like, I just bought a little house. I'm just enjoying my rent. I have no putia. I have no money left over. So I'm sitting on the carpet just like,
Enjoying my rent. You're going to spend the next like five years being like good. Why don't you guys come over? Everyone come over. Hotluck dinners for life. Please bring enough so that I can save it and have for the rest of the week. I will be freezing the dinners that you bring for me. Yeah.
We don't want that, right? And so what ends up happening is when interest rates are high, it is harder for us to borrow money. So we're not buying houses. We're not buying a lot of shares. People aren't buying businesses because the interest rate on all these loans are quite high. So the economy kind of slows down.
But when interest rates drop, the cost of borrowing drops. And so it costs you less money to borrow money to start a business. It costs you less money to borrow to buy that same house or to have credit card loans or mortgages. And so more people are buying homes, they're starting businesses, they're investing. And so we're kind of stimulating the economy again. This is what happened during COVID.
Yes. Oh, exactly. So during COVID, the governments were like, oh, lockdown. What are people going to do? And they're like, what if we encourage everyone to buy?
Has anyone thought about spending property? Your financial situation, your job is undecided, but interest rates are so low. You can buy a house now. You can buy a property. Is that when you purchased yours? No. A few years after COVID, so we've been in our fuddy. We've been in our house for two years now, so 2022. In 2022, the interest rates weren't as low as they were in COVID, but they were good.
It was a good time. It was, I think, like four things. I was like, seven. I was like, no, who said that's a good time. Seven now it's gone up to like six, six point five or something like this, which is really high. Yeah. However, it is starting to come down. So we like it. Interest rates, getting cut is a good thing.
And do all investments go up when interest rates get cut? That is a good question. When you think about it, you could say probably almost all sectors go up, like if interest rates are low, then any business has now lower debt that they have to pay off. So if you are like an e-commerce business and you are like Amazon new sell,
to people all around the world. All the debt that you have like borrowed for your company to expand and reach new markets is now cheaper. So maybe you're paying like $10,000 a month in debt to pay off that interest, but now it's dropped off. So you may be only paying $7,000 a month. And so your company is automatically making more cash just from the savings of your debt being lower. And so almost all industries will benefit from rate cuts, but some do much better.
And some do not as well. So at the end of the day, we follow winners on this podcast. Yes. Love that. And so we'll be talking about which investment classes do well during interest rate cards, because at the end of the day, some do well, some don't. We want to know what ones are doing. Well, why would I care?
I wouldn't. If I was listening, I'd be like, okay, next. Thank you for explaining it, but I'm not going to do it. Yes. On that note, Sim, what asset classes are worth looking at? When interest rates fall, there are some that do well, some that don't.
Usually high-interest bonds become more valuable and that's like quite a jargon term. Like high-interest bonds, what are they? Please break it down. Bonds are when it's a type of asset class. So you've got shares, you've got property, you've also got bonds and funds. And bonds are an asset class where if Maya, you're someone that wants to buy a bond, you basically get to act like a bank.
And if I'm a government agency or a business, I'm like, Maya, I need $20,000 from you. I promise I'll pay it back. I'm the government. Like, come on. Trust me. Come on, though. Like, I will give you the money back.
Okay. Not a crypto bro. Yeah, I am the New Zealand government. And so you're like, okay. And so you give me $20,000 and I will give it back to you. And I actually do because I am the government. And I'll give it to you at like a two or 3% interest rate, which is not very high. No. But it's because you're probably guaranteed to get that money back. So it's like low risk, but low return. Okay. So that's all bonds are. And when interest rates drop, bonds rates drop as well.
So right now, if I was a government like pre interest rates dropping, I'd be like, Maya, if you buy a bond from me, I will give that back to you and I'll give you 4% on your bond. And you're like, okay, that makes sense. Now interest rates are dropping. I've given you 4% for your bond, but let's say Julian, your husband comes to me like a year later. I'm like, Julian, you're late.
bonds interest rates are cutting so I'll give you a bond but I'll give it to you at 2% because interest rates are dropping. I don't have that kind of money to give you.
Like getting debt is easy for me now. So Julian gets a bond at this more demand. Yes. So Julian gets a bond at 2%, but you got your bond with a 4% return. So when interest rate cuts, the bond that you have is now even more valuable. Right. Because you're going to get more. I've got more interest. So your bond goes up in value even more. So you make money.
Okay. So during interest rate cuts, high interest bonds like yours, anything like 4% become more valuable in relation to new ones which pay a lower income. Okay. So your bonds are worth more than if someone else was trying to buy a bond now. So we want to get the bonds that have a high interest. Absolutely. Okay.
It's not too confusing. No. I don't think any of this is confusing. It's just the words. High interest bonds. Well, yeah. And that's what we here to do is to break down the dragon. God's work. Yeah. And so how do you actually find bonds like that that have high interest rates? So you can either go and look at bonds individually on a brokerage website, but that is a lot of it. You already already know. She didn't even finish her sentence.
That's not for you. Okay, sorry, carry on. Why?
It sounded like going on a brokerage website and manually looking like it just seems painstaking to look through things and you didn't even finish your sentence. So I may be eating my words. Please carry on. No, you're absolutely right. That's not an issue at all. One of the ways that you can find bonds that makes you not want to cut me off is looking at a fund with lots of bonds in them. There we go.
You saw it coming. Works matter, not harder people. Absolutely. And so fund is a basket that has lots of different companies, but in this case, lots of different bonds. And one of the world's most popular one, which has $13 billion under management. So $13 billion worth of bonds are in this. So some could say bonds are popular. Yeah, a little bit.
13 billion was it? More bonds in people. I'll tell you that. Yeah. Is it? Yeah. Yeah. 9 billion. Keeps going. Oh, yeah. We need it. We need to slow it down. Anyway, one of the funds has $13 billion under management. It's the Fidelity's cap and income fund. And its ticket is FAGIX. And I
I'm not going to attempt to say that. No. I tried to earlier. We're cutting that out. Yeah. We're just going to swiftly move past it. Yeah. It has below credit quality bonds, but Morningstar rates set five stars. So Morningstar is like one of those publications that will look and rate. They're like the teachers of the share market. They'll like score different investments and be like, oh, Apple gets three stars or like this company gets four stars. So they also do that for funds.
So just a good way to be like, am I investing in a lemon, like something that's bad or something unethical? So they rate it five stars, it's well diversified. And in the last 12 months, they brought a yield of 5.5%, which is pretty good for bonds, because as we were talking about earlier, sometimes it's 2%, sometimes it's 4%. So for a very low risk investment, a 5.5% yield is like solid. We like that.
Another one is the Vanguard Intermediate Term Treasury Index Fund, V-G-I-T, Vigot, and they have had a trailing 12 month, so they've returned over the last 12 months, 3.3%.
which is more realistic of what you expect from bond. So it's not always going to be 5.5. No, but basically in a time like this, getting into bonds that have high yields is going to make you a little bit more money and it's low risk and they're low risk.
Because it's the government, remember? It's me. I give you your money back. I promise. It's not like your friend that's like, Maya, I am going to start something. And I just need like $2,000 today. And I promise you I'll give you like 10% interest. You're not going to see the 10% interest. You're not going to see the $2,000.
You're just going to love your friends and hope they do well. You're just going to give it over and be like all the best, you know? But the two are going to be the best. I think so. All the best on your business. I hope it really goes well. But in the back of your mind, you kind of are like, I'm not expecting that big.
It's charity work. Yeah, and that's fine. Yeah, we love them. We love them. And so you spoke about property earlier, Sim. I've heard real estate is also another asset class that goes up during interest rate cuts. Absolutely. When it comes to real estate, when rates fall,
Rates fall in a number of ways, but what really falls off is commercial and residential real estate mortgages. They get cheaper. Commercial and real estate. Commercial is, well, commercial like businesses. Commercial real estate. So the buildings are the businesses? Right. Yeah. And residential real estate like houses. Okay.
Yeah, so if you want to buy like some people will buy like a warehouse and they'll own the warehouse and they'll rent it out to like an Amazon fulfillment center and they pay them rent and they're like, why not? Yeah, it works. And then you've got residential real estate, which is just like people like you and me like buying a home. And we all have mortgages on them because not many of us were given like $10 million to like buy homes in cash. Oh, my goodness.
I don't think about these things today. They don't. But you end up finding that the interest rates on these mortgages start to drop off. So suddenly, real estate that is residential and income producing becomes less expensive to own. And so rather than being like, my and I can't buy that house because it would be like,
50% of our income. If interest rates are really low and we get that house at like a three or 4% interest rate, maybe that home's weekly repayments or monthly repayments, only 20% of our monthly income. And that's like a lot more doable. And it might be even so doable that we might buy that and then the year after be like, wait, could we?
leverage ourselves a bit more and buy another one. So you go from like not being able to even buy one to suddenly debt is so cheap, you can buy multiple homes. So now more people are buying homes, more people are like, homes are selling really fast, let me do up my home and sell it for even more. And so you have more economic development. And so now that interest rates are cutting, like my theory is that we're going to see bonds go up, but also real estate will start to slowly trickle up around the world too.
So it's a good time to invest in both. It's a good time to invest in both, especially if you're like, hey, I'm here for the long game. Like if you're trying to make a quick buck and be like, I'll just buy some real estate now and then sell it in a year's time. Like that might not yield in anything. No.
No, I'm not going to put it out there. Put it into the world. I mean, it's unlikely because property, real estate, increases value over time. And very unlikely in a short period of time, so much can happen. You just don't know. It's also, personally, as someone who's bought a house, it's not worth the hassle for just a year, my goodness, to get like maybe, maybe,
under 20k, like back. Yeah. And is that worth the stress of a year? No. I don't think so. Not if you're trying to do it like all the time. Yes. Yeah. And so you might go, okay, that's fine. I want to do that, but like, Sim, I'm not someone that has the money to buy real estate. Like, okay, I hear real estate will go up in the next 12 months. Am I someone that can go off and just buy real estate in the next 12 months? Most of us know.
And so one of the ways that people are trying to make use of this is investing in REITs, which are real estate investment trusts. Tell us a little bit more about REITs. They're baskets that let you invest in property without owning property. So in the same way that bonds, we were like, okay, we don't want to individually buy bonds, but we can buy a basket with lots of bonds in them.
Reads our baskets that say, okay, we're going to invest in the companies that purchase do up and sell property. And so if they do well, that's because the property market's doing well, so your money will do well. So it's like investing in property without owning a piece of land. Owning.
the property. And you're also not buying like little pieces of land with lots of different people. You're buying the ownership and the operation of real estate properties around different parts of the world. So one of the most popular ones is the Vanguard Real Estate ETF or VNQ. And this tracks and index of companies that have ownership, that have operation in real estate. And in the last five years, it has returned about 4.1%
And it's given a dividend yield of 3.7%. And so you might be thinking, well, the share market on average gives me 7%. Why would I go for a 4% returning fund? It's because it's more in line with what property would give you, like your house would usually, you'd hope go up about 4% per year. So if you don't have that money, that's okay. You can put it in a fund.
as the start of your journey towards real estate. So it's more about diversifying your portfolio and providing an opportunity for those who are interested in investing in real estate but either can't or don't want to have that physical responsibility of managing the real estate because that's a lot of work. It's a lot of work. Yeah.
If you had to choose of these two options, bonds and a real estate fund, which one off the top of your head makes you feel excited, Maya? Excited? Well, the 5.5 got me excited.
with the bonds. That was the FAGIX return. Yes, I think probably just bonds. I'm personally not too interested in investing in property. I'm fortunate to own my own fuddy, to own my own home. And I've never really viewed real estate as a way of creating an income. I mean,
It's really nice to know that that's available. I never say never, but I'm leaning towards bonds in this. How about you? I love that. I like a bit of both. I truly think that I'd rather have a little bit of everything than all of one, because as much as I think I know what's going to happen, I could put it all into shares and then shares don't do well. All into bonds and bonds don't do well property.
So I think a little bit of all, but probably, but being completely honest, I think I'll still keep most of it in shares and then spread a few into bonds and a little bit into rates. I don't know if I'll be buying more rates just because I think I would like to see the year out a little bit and see how it goes. I think what I like about these conversations is it's good to look at all the options, discuss it, and at the end of the day,
It's not like a clear cut like, oh, obviously my own sim are going to go to that option. There's the options, then there's the time that's involved in them. And then also like our personal beliefs and values. And we might have different views on things. I don't mind investing in property so that gives us a different view on it. And that's why I think investing is so personal. And I love it because someone can listen to this episode.
and be like, oh, the best thing to do is this. And so I can listen to it and go, oh, the best thing to do is something completely different. Yeah, it's all subjective. And there are so many components of your life that you need to take into consideration at that time. So it just depends on what
people like and what their values are and what they're interested in as well. Yeah, someone could be interested in looking at every single bond and comparing them to the yield. Yeah. And look, I am so totally, what's that saying? Yucking your yum.
Have you heard about it? I don't want to yuck anyone's yarn. Yeah. Do you boo? If you genuinely, that's what you want to do. I am not at all stopping you. Personally, it couldn't be me. You sound like someone talking about your conservative beliefs.
Hey, I don't want to yuck you now. Personally, I'm not individually searching through all of those bonds, me and me. No. And with you. Now, with that, if you've enjoyed this episode, let us know. Give us feedback. It is the best thing that we can do to help the channel grow. And with that, we'll see you soon, Maya. Take a kiss. Bye. Bye.
And as always, to finish off with the disclaimer, Girls That Invest does not provide personalized investing advice for your individual needs. We are not financial advisors. The advice from Girls That Invest exists for educational purposes only and should not be relied upon to make an investment or financial decision. Advice from Girls That Invest is general in nature and does not consider your individual circumstances or as you research and please do your due diligence.
