Investing for the long term
Investing in well researched, well located residential properties and holding for the long term has allowed many Australians to create substantial asset bases and achieve the financial freedom that they were aiming for. Myself included. A quick glance at the table below illustrates how well it has performed as an asset class over recent years, despite regular dire warnings from various doomsayers predicting market stagnation and prolonged periods of falling property prices.
However, notwithstanding, long term performance growth is rarely linear and cash flow is also not always 100% predictable. Even larger population bases with all the key drivers present can experience periods of volatility that can take even the experienced investor by surprise. So is there anything we can do to insulate ourselves from unwelcome surprises? There are certainly some practical measures that can be taken. And more often than not an adjustment of attitude and expectation is also required. Let’s first take a look at a couple of practical measures.
Spread the risk
Your average person does not cope well with financial stress. If they have little ‘wriggle room’ financially, this may cause sleepless nights. Even if things are OK at the moment, many worry about how they will cope if something unexpected happens. If most of their earned income goes towards daily living expenses, where will the extra money come from? It makes sense to have income protection and a cash or equity line buffer. However they shouldn’t worry unnecessarily. If they have taken out a mortgage on their properties banks will have already looked at their finances and applied their own stress testing. Typically they will factor in at least 8 interest rate rises, and often only take 75% of the anticipated rent into the equation. Remember, at the end of the day it is their money and their risk, so if the bank has approved the loan then the investor shouldn’t have sleepless nights.
Take a long term view
Having been investing for 15 years now I have lived through a couple of property cycles I know that occasionally a particular market may slow, but experience tells me that sound areas will always rebound and get pulled back to the long term average. New investors have less experience and often panic when things slow down – they find it hard to see beyond what is happening in the market in any particular week. Assessing their investment on a monthly, weekly or even daily basis is unhelpful and will drive them crazy. It will lead to buyer’s remorseand could lead to poor decision-making. Focusing on the long term potential and what lead them to invest in that area in the first place should help them to keep a cool head and ride out any short term volatility.
In my opinion the Australian property market has become a little less predictable than it used to be. This can spook investors and lead them to act irrationally. However, in spite of occasional periods of localized volatility, the Credit Suisse 2013 Global Wealth Report ranks adult Australians as having the highest median wealth in the world, and an average wealth only second to the Swiss. If you are only focussing on the negative you often lose perspective. Sure, as an investor you will inevitably hit the odd speed bump, but it is important to stop and smell the roses on your journey. After all, according to Credit Suisse we have absolutely nothing to complain about.