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Apparently, some 800,000 of us take a peek at my publication every week. Impressive. That probably reflects the attraction which the property has to most of us – either in terms of undertaking an actual search for somewhere to live or invest in, gauging what one’s house might be worth in today’s market, peeking inside nice places to get redecoration ideas, or simply for pawing over. A few weeks back I wrote an article comparing potential returns from keeping a property I have in Auckland or selling it and depositing the money and I thought Overview readers might find some interest in it. So here goes the same subject. One of my properties is a little studio in Auckland. At a stretch, it might sell for just under $300,000. Let’s assume it did. I could bank a capital gain and feel clever. But what would I then do with the money as a conservative investor? If I put the $300k in the bank I could get 3.5% which after tax would deliver $7,000 in the hand each year. After ten years I would have saved up $70,000 plus some compounded interest. If I keep the apartment I also will get about $7k in the hand after expenses and tax adding up to $70,000 plus some compounded interest. Am I indifferent between the two options? No. After ten years my $300,000 term deposit will still be $300,000 plus the accumulated interest. My little apartment, however, is really, really unlikely to still be priced at $300,000 a decade from now. I would expect it to rise at a pace of at least 2% per annum. Therefore, attractive as the thought of getting $300k in the hand is at the moment, if the alternative is placing the capital on term deposit and watching inflation eat my capital away I opt to keep the property and rent it out.
Of course, there are other alternatives such as investing in equities. Would I personally do that? If I did I would space my entry into the markets over an extended period of time, say 12–18 months. I would also probably not pick my own stocks and opt for whichever fund had the lowest fees. Over the long-term investment in a diversified portfolio of equities tends to yield good returns. You can opt for a portfolio biased toward high dividend stocks if you want some decent cash income along the way. I have no hesitation when young people ask me about investments telling them to place what they can in KiwiSaver, build up a fund to get a house deposit together, pay down their mortgage as quickly as possible, and concentrate on their education, their work skills, their actual job, and training themselves to remain awake to the many opportunities continually presented to us all these days for skill and career advancement. Here are a couple of psychological things you
should be aware of when you sit across the table from an investment advisor. First, having capital available to invest is a source of stress. You don’t understand this until you are actually in that position. Are you a conservative or risk-loving investor? When might you need the money back? What other income sources do you have? Your desire to get rid of this stress will have your mind constantly on the lookout for something that seems to be a solution – whether it really is or not. Your mind will talk you into believing that if you invest in such and such a way you will be
alright. All your mind wants is to get rid of the uncertainty stress as quickly as possible. Advisors know this. This means that much as we have all heard the saying that if something looks too good to be true it probably is not, our minds in these times of stress actually seek out such things choosing to believe they are!