Investing is made up of lots of different pieces. Location, price, growth, tax, finance, gearing, rental returns to name a few. There is a lot to consider before a decision can be made. For me though, there is only one part of investing that is head and shoulders above all the others. One part that is the most important, the most crucial. Do you know what it is?
The answer is You.
Yes, as funny as it may sound You are the most important. Think about it. You make all the decisions. You select the property, the location, you make the offer, you decide on the terms. You have the most influence over You. You make all the decisions, even the decision to do nothing.
Depending where you are on the investment cycle each of these pieces will take on a different level of importance. A high income earner may well give tax and gearing more attention while a novice investor may well see research as the key.
But, above all else, Investing is an emotional activity. There is Excitement at deciding to invest, the Thrill of researching and securing a property then the Euphoria of reaching your goal and settling. There is a connection between the decisions you make when you are positive and the decisions you make when you are fearful. Your emotions will determine how you view your position and the action you take in relation to that information. Understanding where you are in the cycle is important so you can make sure your emotions are not undermining your long term goals.
Have a look at the chart below, kindly compiled by Raymond James Research. It shows the rollercoaster ride we have emotionally when we invest. That’s any investment by the way, not just property.
Where do you think you are in the cycle right now? Like me, you have probably been in every one of these at some time or another and there is nothing wrong with that. Knowing where you are can help you decide on what action to take. You can see from the chart that there is a relationship between feeling good and taking risks.
The better we feel the more likely we are to focus on the good results and downplay the negative. Conversely, there is more opportunity awaiting those that are despondent simply because they will move through those negative feelings towards hope and optimism. The realisation that things are not so bad builds optimism for the future.
Should we decide to purchase a property when we feel Fear and Panic? Probably not. Just as we should recognise that the excitement we feel is a reason to look into possible risks associated with making a decision.
Emotion also plays a role in how we view our investments. Take a look at the charts below.
Let’s call one the Emotional City chart and the other Emotional Dwellings.. Have a look at the wavy line and imagine this is the emotion chart we looked at earlier. Again, Risk is at the top and Opportunity at the bottom. Where do you think each Capitol city is on the Emotional City chart? Remember there is no right or wrong here, only how you feel about things.
Place a cross on where you think Melbourne is, then Sydney, Brisbane etc until you have all the capital cities allocated on the chart.
Now, where would you invest based on what you see?
You can do the same thing for the Emotional Dwellings chart using House and Land, Apartments and Off the Plan. Which of those has the most upside and what has the most risk? (Hint: If you attended the “Start of Financial Year: Budget Update” seminar you should feel good about doing this one.)
By now, you can probably understand that how you feel about each location and each property type determines your emotional outlook for your own financial future. The next step is to validate your feelings with the facts available through data and research.
So then you can apply a rationale to proceed with the appropriate action to your situation. For example, your feelings might lead you to think that you should sell whereas the data may show the opposite. By applying rationale you can avoid an emotionally driven decision which may negatively impact your financial future.
For anyone who is fearful of where they are financially there is something you can do today, right now, to feel better. Take action.
For anyone who is excited about where they are financially there is something you can do today, right now, to feel even better. Take action.
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