9th November 2016
Thanks for taking the time to click through and read this Blog, I can guarantee that it will have a positive impact on you, possibly save you from making a really big mistake in the near future, and possibly ensure you stand to profit in a big way. How does that grab you!?
I drove across the country today, heading to work with a team of financial advisors, and it dawned on me how wonderful a country we have here! I can hop in a car on the very East coast of the country and end up on the very West coast in just over 2.5hours. Looking at maps of USA today as the news of Trump’s Presidential Election victory emerged the same could certainly not be said of many other countries. A historic day today, 9th November 2016. A day which the media has taken to with great gusto, and as a result we have seen all sorts of headlines promising certain infernos and stock market collapse.
What has this got to do with investment mistakes you may ask. Well it is the number one mistake which otherwise savvy investors make, they see headlines such as above and every part of them tells them to get out of the things which they are in. It is human nature, if you are in a burning building you jump out the window, survival kicks in!
Preservation becomes the priority, and in order to preserve your investment while you believe it’s sliding downwards and losing value by the minute you get it out of whatever it is in which is causing it to slide. While this may seem logical on the face of it, it isn’t! Provided you are in the appropriate place in the first instance, and you are within your time-frame, why would you do that? Check out podcast episode 10 here for insights on how to ensure you achieve this in the first instance.
We all love property, so lets have a good look at this example. Lets pretend for a minute that you bought a house for €300k cash, no borrowings, as an investment over the course of 20-30years. The following year due to some economic crisis outside your control the value fell to €190k (might not be too difficult for some to imagine, yours truly included!). At that time common sense suggested that it would recover in value in 10-15 years, but it would be a slow process. What would your logical brain tell you to do?
Option 1: Sell it now for 190k ( though it would be a natural reaction to ‘preserve’ remaining value it’s consolidating a big loss)
Option 2: Keep it and wait for it to recover in value (would seem a logical approach)
Option 3: Keep it, and buy another one for 190k! (Brave, very brave, but makes sense?)
Which one would you do??
Lets look at what ‘we’ actually did when this happened………………..
The above chart (Credit to Abraham Okusanya at Finalytiq in UK) shows how ‘we’ react when things go south! The narrow line shows the overall value of Property from 1996-2015, and the solid shaded areas shows the level of investment/divestment in Property for the same period.
In summary we invest and buy into things when they are ‘flying it’ and when they are ‘plummeting’ we sell! It is the equivalent of selling that 300k house for 190k when the value dropped. That is what we do by nature. We consolidate losses in the interest of ‘preserving’ value. We try to preserve falling values in that manner, it doesn’t work! This has a detrimental impact on our returns, our compounding, and our plans.
Irrespective of whether it is a Pension Fund, a Lump Sum Investment, an Equity Regular Saings plan, or indeed a Property Investment, if you are in it for the long term the following might be sage information to consider. How about we stop reacting, stop listening to the media drum-banging and to stick to the plan?
Sticking to the plan will help us to achieve the magic of compound interest (Read Blog #7 here to find out about the magic of Compound Interest). It will help us realise our goals with regards our investments, and ultimately to live a less stressful financial life.
If we followed Warren Buffet’s advice and were ‘fearful when others are greedy and greedy when others are fearful’, we would not buy when things are going really well and values of investments are up, we would instead buy when values fall. That’s a brave and bold move, not for everyone, but what should be for everyone is to stick to the plan, don’t jump out that window, stick to the plan, it’s not a fire that will permanently wipe out the your house, it is usually a firework that shouldn’t cause long term irreparable damage.
Try and enjoy the ride, take it in, knowing that you have a plan, that you chose well in the first instance, and that the fireworks aren’t permanent. Consider this if things do get a bit rocky in the short term, consider your own time-lines and seek the advice of your advisor prior to making any rash decisions about jumping anywhere.
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