Welcome back to our two-part series! In part one, we looked at:
- How Isaac Newton lost the equivalent of £3m in today’s money (2017) by chasing the market
- Why 80% of day traders mainly lose money when following “hot tips”
- How the same data can be used to spin two very different stories
If you haven’t yet read part one, click here. Otherwise, let’s jump back into exploring two more really simple investment mistakes which are often overlooked.
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Following the crowd to nowhere
When we asked investment experts if investors should take risks or avoid them, many agreed that risk is a personal thing. Your investment plan should be yours - not anyone else’s. If you don’t want to choose risky investments, why would you?
You need to be comfortable with your level of risk. Adopting a plan that isn’t yours might not take you where you want to go. Here’s an example:
When you book a holiday, you often know where you’re going, how you’re going to get there, how much it’s going to cost you and what you want to get out of it. Why would you approach your own investments differently?
Following someone else’s investment strategy can be like blindly tagging along on someone else’s holiday. They could take you skiing in the Alps and you could hate the cold. They could take you to a tropical island and the tranquility could bore you.
In the same way, they could pull you through the stock market when you hate risk, or they could tell you to leave your investments in cash when you want to pursue higher returns.
And if you’re tempted by their results, it’s unlikely you’ll have good reason to be. In the world of investments, if someone announces that they have made millions by doing XYZ, chances are you won’t. For two possible reasons:
- What their asset classes did over their investment timeline might not happen during yours
- You’ll probably be investing for different things, prefer different levels of risk, want different levels of liquidity and have different time horizons to work with
By all means, learn how other people have made their money. But there’s a real danger in assuming investment strategies operate on a one-size-fits-all basis.
You need to know where you personally want to go. In The Eternity Portfolio, Alan Gotthardt wrote,
“Investing money is the process of committing resources in a strategic way to accomplish a specific objective.”
That specific objective is unique to you. It may sound like an unnecessary step, but taking some time to think about this, and formulating it into a couple of sentences could add an immediate ounce of clarity to your financial plan. Here’s a formula to get you started:
- Goal amount: I want to give my child £12,000 or I want to have £150,000 saved up for retirement
- Deadline: On their 21st birthday or when I turn 67
- Monthly budget: I can afford to set aside £50 a month or I want to save £500 a month
- Risk attitude: I want to avoid risk or I don’t mind taking risk in the hope of pursuing faster growth
Not only might a goal make your financial plan more achievable, it might help you get there quicker. Runners speed up when they see the finish line. Goals push you forward, and turn “insurmountable mountains into walkable hills.”
As highlighted by our crash course on asset classes, property investment seems to sit in the middle of the risk/reward spectrum. Traditionally, property investment has a lower level of risk than the stock market, yet boasts the potential to outperform the FTSE 100, potentially making it a popular asset class amongst different types of investors.
On our platform, we list a variety of products which range in risk and reward, providing our members with the tools they need to create personalized portfolios.
Note: A bonus point to consider when planning your investment strategy is how comfortable you are with having your cash tied up. Within property investment, there’s often a lack of liquidity. But we’re trying to fix that with our secondary market.
However, please remember your capital is at risk if you invest.
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Forgetting to watch the paint dry
Wouldn’t it be fantastic if investing made us millionaires overnight? Unfortunately, that’s not how it usually works. As Paul Samuelson famously said,
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
When investing, you should give time, time. View your investment plan as a long-term journey as opposed to a quick fix to getting rich. Managing your expectations might be one way to do this, though, as it turns out, we sometimes struggle to do this. A press release published by AMG Funds revealed,
“Millennial investors expect to earn an average annual return of 13.7%, significantly higher than the 7.7% annual return expectation of Boomers.”
However,
“Nearly two-thirds of Millennials define “long-term” as a period of less than five years, while only 21% of older investors expressed a similar view.”
Unfortunately, there seems to be a mismatch between expectations and our levels of commitment. According to Barclays, a short-term investment period is a minimum of 5 years, and in a letter to the shareholders of Berkshire Hathaway Inc., Warren Buffet wrote, “our favorite holding period is forever.”
As a practical example, consider purchasing a property in the UK in Q1 2000. According to Nationwide’s UK House Prices Since 1952, the average price was £77,698. If you were to have sold it 5 years later, when average house prices were £152,790, you could have made a profit of £75,092. Based on the property’s resale value alone, your initial investment would have grown by 96.6% within 5 years.
However, if you had held the property for a total of 15 years before selling it, at which point average house prices were £188,566, your initial investment would have grown by 143%, which we believe is significantly more rewarding than a 5-year holding period.
However, past performance is not a reliable indicator of future results.
It’s important to note here that house prices dropped dramatically during the crash of 2007/8. However, you could argue that within property investment, losses are only actualized at the point of resale - which is why longer time horizons can offer you the space to potentially recover from blips. So, even though house prices dropped by 14.7% in Q4 2008, in the long run, resale values rose considerably.
Written by Jenna Kamal
Disclaimer and Legals
Property Moose does not provide any advice in relation to investments and you must rely on your own due diligence before investing. Please remember that property prices can go down as well as up and that all figures, rates and yields are projections only and should not be relied on. If in doubt, please seek the advice of a financial adviser. Your capital is at risk if you invest. This post has been approved as a financial promotion by Resolution Compliance Limited.
Property Moose is a trading name of Crowd Fin Limited which is an Appointed Representative of Resolution Compliance Limited which is authorised and regulated by the Financial Conduct Authority (no: 574048).
