Why I Am Glad That The Housing Market Is Collapsing
Did I get your attention with the topic?
Good! I am glad!
Because now that I have your undivided attention I want to talk to you about the housing market and “the markets” in general.
Why am I glad that the housing market is dropping – well, because it should serve as a reminder that not all markets go up on a straight line – Not real estate, not stocks, not bonds, not GICs…nothing in life does!
And furthermore, it is the “emotionally charged” words that I just used to capture your attention – that the mainstream media uses to grab your attention…often to the detriment of your portfolio – and your peace of mind…
You know the kind – “the Dow plunges 300 points” – “Oil “spikes up” $30 a barrel” – and the like…
And why do they do it?
Yes, they are reporting on a newsworthy event – but, in my opinion they are sensationalizing that event so that they will capture the minds and dollars of those listening and reading.
To sell more newspapers and expensive air time!
Furthermore, in the financial realm (the world I live and breathe in) , I believe that it is this type of “emotionally charged” reporting that makes investors doubt their investment strategy and their investments…and often their advisers…
We all know and understand that to create real wealth we need to “buy assets low and ultimately sell them high”.
That’s what we do with real estate!
However, after listening to the media night after night – or reading the papers day after day the sensationalized “gloom and doom” reporting often actually convinces many investors to do the craziest things with their investment portfolios – like “tossing in the towel” when the “markets” are at rock bottom. Then, often only a few months or a year later these same investors are regretting the fact that they didn’t stay invested because the “markets” are at a much higher point…
I am not surprised, because after all we are all human and are governed by the emotions of – fear and greed…
However, we need to temper those emotions with a dose of common sense!
If the real estate market “plunged” by say 20 percent – would you immediately run out and put a “For Sale” sign out on your lawn? Then sell your home and rent until you felt the real estate market was coming back ?
Of course not!
Because history has show real estate to be a resilient wealth creation asset!
Unfortunately, with the “main stream” media often little is ever spoken about – let alone dramatized about: “real estate values”.
Because local real estate prices are – well, local – and valued locally…
Local real estate values (your home and mine) are often difficult to ascertain and they are not published daily like stock, bond and mutual fund tables are.
On the other hand, publicly traded securities such as stocks and bonds – or the indexes that reflect the values of these securities are – well, much more sexy and exciting to cover and talk about!
This type of coverage sells “air time” and newspapers!
Real estate is valued locally – and therefore gets little to no media coverage…
Stocks, bonds, indexes such as the Dow, the Toronto Stock Exchange, etc. are valued “internationally” and get wide reporting through the various media channels…
However, history has also shown “the markets” to be a resilient wealth creator – over time!
Just like real estate…
OK, so where am I going with this all?
Well, first off – do not make comparisons about the difference and/or returns of “stock markets” and your local “housing market”.
It’s totally unfair and wrong.
They are two different animals!
One is priced and valued locally – your home.
The other is priced and valued internationally – the stock and bond markets – which usually comprise your investments, RRSPs your pension plans and the like.
And though you may think that your home is the best investment you have ever made – believe me when I tell you this – the stock markets – over time – have delivered superior returns over the housing market…
And another thing.
Many Canadians believe in the “safety and security” of bank purchased GICs…
While it is true that a GIC will never be worth less than what you initially purchased it for – unlike periods of time like a home or and investment portfolio…
It is important to understand that if the real estate market (remember the early ‘80’s?) or purchasing GICs were the “best thing since sliced bread” all portfolio managers, pension managers, high net worth money managers and investors the world over would just purchase these assets and spend the rest of their time improving their golf game…
However, this is not the case, one must have different asset classes that yes, will include GICs, and real estate but will also include stocks and bonds and precious metals, and income trusts and exposure to oil and gas, etc.
To reduce the overall volatility of the portfolio and also to enhance the investment portfolio and its returns – over time.
Why is this important?
Because the goals that you have cost money!
Taking an extra holiday each year.
Putting a new roof on your home.
Paying off your mortgage early.
Paying for your kids education.
Planning and saving for retirement.
Making sure that there is enough money in retirement that you will not outlive it!
Now, these are all noble and worth while goals… Goals that I keep my clients focused on achieving!
And so: Learn from the wealthy!
Their 2 rules of investing – (and mine) are:
Rule #1. Don’t lose the money (meaning selling out of your positions when your investments have a temporarily lower value than when you purchased them)
Rule #2. Don’t forget Rule #1!
The wealthy are much more concerned with preserving their capital and getting a consistent return on their money…
This is what they ask their money managers to achieve for them.
Because they need the capital for their philanthropic purposes and charitable endeavors – as well as for their personal use.
They understand that they are merely “trustees” of the family wealth and in fact will need to pass on the money for the benefit of future generations to come…
They are not swayed by newspaper headlines or the 11 o’clock news!
They stay the course!
The have a plan and follow that plan – that’s how success is achieved!
They know that there will be dips along the way. They understand that no asset class rises in a straight line!
Not housing values, not GIC rates, not the price of gold, the TSX or the venerable DOW.
They understand and harness the knowledge that every asset class and the “market” that reflects it – has it’s own distinctive and unique cycle – that it follows.
The wealthy are looking out and planning for 5, 10, 15, 30 plus years out…
So shouldn’t you?!
Its natures way as well!
In fact, everything in our universe has cycles!
For example: We have the 4 wonderful and different seasons – one following the other – however, none of the seasons follow precisely as they did a year earlier.
However, there is a constant rhythm in nature – and by extension – our lives…
Now, we know this and that is why we continue to plant out bulbs in the fall and look forward to seeing lovely blossoms in the spring.
That being said, would you decide that half way through a difficult winter you should dig up your bulbs to check them out just to make sure that they were all right?
Of course you wouldn’t!
But maybe you are a bad gardener – and you can’t let it alone…
Then I would suggest you won’t be seeing any blossoms from those bulbs in the springtime…
Oh, and what about the mighty oak tree?
It all begins with an acorn…
Do you see an analogy here to investing?
I certainly hope that you do and that this serves to inspire you to “stay the course”!
If you agree that you will be spending the rest of your adult life – in the future – only you can predict what kind of a future it is going to be!
So my advice to you is that it would be better for your mental health – as well as your portfolio – not to get caught up in the “noise of the markets” and continue focusing on what your medium and long term goals are…just like the wealthy.
Trust me on this, because I have been in the business for over 22 years – if you do this, you will have a more enjoyable and stress free life – and still have the money in hand to do all the things you want to do.
So in closing:
Do you think that your home will be worth more in 10 years from now?
History has shown that to be true!
Click Here to see the Canadian Real Estate Andex Chart
Do you think that your investment portfolio will be worth more in 10 years from now?
History has also shown that to be true!
So now, take a deep breath – turn off CNN and stop believing the headlines in the papers…
10 years from now you will be in a far better place than where you are now – and that’s something you can “bank on”!