Australia as it stands today is enjoying a ‘perfect storm’ of opportunity for property investors. Interest rates sit at unprecedented lows, making more funds available to the average investor due to their increased borrowing abilities. A lot more funds are in the market due to the government issuing more money. Increased equity positions due to property price growth are enabling more funds to be released for refinancing properties and seeking other opportunities.
Understandably there is a great deal of interest in all sorts of opportunities at the moment. So this month, I thought I’d touch on how you can reduce your fears of ‘making a mistake’ when you find you have money to invest.
Now most of us will agree that fear or greed are often considered the key drivers, or stops, for investors. I’ll be honest with you, fear is my ‘Achilles Heel’ as an investor. I do sometimes fear failing with my own investments and as a consequence I put a myriad of risk management processes into place whenever I pick my investments so I can sleep at night with my decisions. (Sound familiar? ☺)
Now my definition of fear is a ‘negative reaction to that which one does not know’. If fear is based on the ‘unknown’ then the cure for fear is of course knowledge.
So what I have found useful to help me personally be less fearful when investing is to invest based on what I call ‘long-run fundamental laws’ that drive the market. These are based on long term observations of how markets work. Here are just a few explained for more clarity:
1) Money supply drives prices
There are several areas where you can observe this phenomenon for yourself.
Long term factors that prove this are:
- inflation – which results from the deliberate printing of money due to government monetary policy;
- government spending – through either infrastructure development or just spending to increase the amount of money circulating through the economy.
Short term factors that prove this are:
- confidence – factors such as scarcity influence investors and favour confidence and increased prices but this factor can come and go in cycles.
- interest rates – the rate on the day can influence how much people are able, and therefore willing to use to invest. Rate changes can drives prices up or down quite a great deal in the short term.
Ultimately it’s the long term money supply that really drives prices in a long term trend, with short-term influences coming and going.
2) Risk and Return are intimately related
It’s obvious to most investors that an increase in the risk associated with an investment normally carries with it a higher investment return potential.
But it’s important to remember that the increase in risk is not a linear relationship, even though it’s always represented on graphs and charts as being so. That is, each addition to the risk does not necessarily add the same return benefit. From this however you can assert that a return is NOT available at all without some risk in real terms (meaning inflation adjusted). So if you want to live in a world with no risk, then don’t do anything. But you won’t get anywhere.
3) Investing is a long-term activity
Investing, by its very nature, is a long-term activity. It needs to be considered, planned and executed with a view of the big picture, long term outcome which enables the investor to hold true to a goal.
Constantly evaluating investments and investment performance in the short-term can lead to reactionary behaviour which can be toxic to long term planning and defeat the very goal one started out with.
4) Those with clear goals do better
When one has a goal to achieve and a clear plan to get there, they are more likely to achieve an outcome. When you look back over the history of successful investors the most common theme is having a goal and a plan.
‘Being lucky’, ‘picking winners’ and ‘timing the market’ are all akin to gambling. Some winners, lots of losers.
So when you take a long term viewpoint you can see for yourself that these ‘laws’ are there for those with clear enough vision to see them. Understanding them and following them helps to reduce fear and propel you towards action.
Now on the greed side of the investor’s motivations, if you think through the above, you’ll be less inclined to chase ‘last year’s winner.’ It is so often the case that the chase ends up being overzealous and ultimately fruitless.
The path to wealth seems to be paved with ‘genius approaches’; lots of people claiming to have discovered its secrets. But a warning if I may. Many of these aren’t repeatable. Nor is it possible to systemise something based on mere speculation.
A systematic approach to investment planning however, by managing your risks and therefore reducing your fears, is an easier route with more sleep, more confidence and most importantly a greater likelihood of success.
With all that I hope that I may have reduced your fears a little and perhaps made your approach to investing more confident. The timing is important as I see the current set of circumstances as one of the best chances to invest that we have seen for quite a while.
So this month’s message is; manage the risks of the investments you feel driven towards and understand them well first. Then find a system that works in that area.
As someone who prefers to invest in property, I am very pleased that today at Investors Direct, we have a system in place for investing in property that works to assess and manage your risks. We improve you as an investor through education and a disciplined process, which can reduce the amount of time wasted chasing dead-ends and improve your potential.
Why not make an appointment to see myself or another consultant at Investors Direct and come and see for yourself. Enquire by email at email@example.com