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Time to Invest or is it Better to Wait and See?

9 November, 2011

It seems that almost every day we wake to more news about economic upheaval in places like Greece and Italy, and fears about the stability of the global economy are hard to ignore. Does this mean that people should “wait and see” before making investment decisions.

An increasing number of respected economic commentators are now saying that heightened market volatility is the “new normal”. As such, if you are taking a “wait and see” position then it is likely that you will be waiting a very long time. Experienced investors often say that volatility creates opportunity and there are undoubtedly some outstanding opportunities out there. I have been surprised that recent opportunities – such as 6% NET return on freehold waterside land – have not been snapped up like they would several years ago.

Regardless of the drivers, heightened volatility requires investors to exercise specific investment strategies. While many of these strategies are basic investing concepts that can be applied any time, they are particularly important in a volatile environment.

Don’t follow the herd. It’s an old cliché but it still holds true – many investors generally buy into the market too late and they sell too soon. Unfortunately they tend to take the lead from the media and generally, by the time that you read that the market has “taken off” in the newspapers it is normally too late!

Keep a long-term perspective. It is all too easy to get caught up in the market’s daily roller-coaster ride. This type of behaviour is natural, but can easily lead to bad or no decisions. Instead, focus on whether your long-term performance objectives, i.e., your average returns over time, are meeting your goals. Property, in particular, is a long-term investment and if you don’t have a perspective of at least 5 years then you are probably best to consider other investment types.

Take advantage of asset allocation. During volatile times, more risky asset classes such as stocks tend to fluctuate more, while lower-risk assets such as property, bonds or cash tend to be more stable. By allocating your investments among these different asset classes, you can help smooth out the short-term ups and downs.

Consider buying opportunities. Although you may be rightfully gun shy in the wake of the recent market turmoil, one strategy you should seriously consider is selectively adding to your investment portfolio. This is especially true when prices are low versus historical averages.

Do Your Homework. It is important to ensure that you are making a fully informed decision. While there is no such thing as a “sure bet” in any market, there are certain fundamental checks, for each investment type, that be applied to manage risk.

Financial Analysis. Take the time to analyse all opportunities using assumptions that you are comfortable with. I generally use reasonably comprehensive spread-sheet modelling that makes it relatively easy to project the financial merits of an investment across a number of scenarios. Consider the earlier example of a freehold land title earning 6% ‘lease’ return. On the face of it, 6% doesn’t seem much more than current bank deposit rates. However, because the lease is reviewed (upwards only) in line with the underlying property value, the return also increases. So, an investment of $100,000 returning $6,000 (6%) in year 1 could be earning $12,000 in year 10 if the property has doubled in value. Average that out over 10 years and the average cash return on the original amount invested is approximately 9%. If inflation takes off within the next year or so as some are predicting, then this might well be significantly more. This is an overly simplistic example but it does illustrate the benefit of doing the numbers.

 

I am often being presented with very good long-term property opportunities. You can check out some of these on my website or, better still, contact me to have a chat about what you are trying to achieve.

3 Comments leave one →
  1. Shaz Davis permalink
    9 November, 2011 3:12 pm

    Interesting article, but it does ignore the fact that property prices are generally over valued

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    • 9 November, 2011 4:06 pm

      Thanks Shaz – Yes – I agree totally that property prices are generally over-valued and investors are advised to be extremely cautious. The same applies to other investment types, including the stock market which, as we have seen in recent months, is extremely susceptible to global volatility i.e. the “fear and greed” cycle. Even the banks are not immune. However, that being said, there are still some very good property investment opportunities such as the one I quoted. As a rule of thumb investors must have a long-term (5yrs+) perspective. The days of speculative investment for all but the most ‘seasoned’ investors, are long-gone and people should be evaluating opportunities for the right reasons – rather than just to make a quick buck. As a prudent risk management strategy, it is important to “assume the worst” (but hope for the best) with any investment . For example, if a property remains un-leased for a period of time, if interest rates increase significantly or if there are higher than expected costs (e.g. maintenance), could you live with it? When working with clients I generally ask them to tell me what assumptions on the key variables (e.g. occupancy rate, personal income, expenses, capital growth rate, interest rates etc) they are comfortable with and we use those as a starting point for the analysis. From there I generally consider a number of scenarios (sensitivity analysis) from “worst case” to “best case” assumptions. The reality is that none of us has a crystal ball – and further “shocks” could be around the corner – but its all about making informed decisions and managing risk accordingly. This also extends to reviewing ownership structures etc to firstly minimise risk and secondly take advantage of any tax benefits that may be on offer.

      At the risk of sounding “crass”, I do think it is important for investors to be totally objective and distill the emotion from the analysis. For example, I have seen investors purchase a very average commercial building on the basis that it is “close to home” when, if they had performed a reasonably simple analysis, it would have been obvious that the numbers and risk profile just didn’t stack up. I even had one investor decide not to proceed with what was, on the basis of the available evidence, an outstanding opportunity, because a friend told them that “if it was so good, why didn’t the locals buy it…”? Also, many people seem to be sitting on cash in the bank at very low interest rates just “waiting to see what will happen”. As eluded to in my article, volatility may be the “new normal” and if people are waiting for the stability of pre-GFC then it may never happen! Also, taking an objective look at the options i.e. bank rates vs other opportunities, can often be a worthwhile ‘tonic’ in defining an investment direction instead of taking the head-in-the-sand approach. This does not imply any recklessness – merely having an open-mind and accepting that sometimes the best cherries do come down in a storm! Quite often the biggest risk is in doing nothing!

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  2. Shaz Davis permalink
    15 November, 2011 4:25 pm

    Great post. It is a tough and volatile investment climate out there right now. Agree that one needs to carefully weigh up the opportunity cost of doing nothing (or more of the same, out of habit without crunching the numbers)…
    Removing the emotional factor from a financial investment decision is probably the ingredient that separates successful risk takers from the rest of us. Thanks for the food for thought.

    Like

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