A report in the Irish Times today illustrates the massive appeal of ‘buying low’. It’s been a mantra of brokers for decades; the ‘you can’t lose’ argument that can be so successful at whetting the appetite of those looking for investment returns.
But ‘buying low’ can never replace buying quality, as Warren Buffett advises time and time again.
In the case of the Detroit property portfolio shambles, it would appear that some of the due diligence could have been emotionally driven and not as methodical or robust as it should have been in order protect investors.
Since the peak of 1.8 million people in the 1950’s to just over 700,000 today, Detroit has been bleeding the lifeblood that drives housing values; buyers.
The city has also bled jobs as car manufacturers shifted production to less unionised southern US states and further south into Mexico and north into Canada.
To put that in perspective, US cities where populations have grown have also seen property prices grow in tandem, including metro New York, Boston, San Francisco and Seattle.
This mix of population and employment growth is the lifeblood of investment success. To grow property prices, one must look for the right mix of conditions, not what looks like a bargain.
Lesson for investors
The stock market is the vehicle of choice for the smartest investors through time. Property is risky, clunky and when market conditions change, incredibly slow to offload from any portfolio, which means it carries too many high risk features for ordinary investors.
Add to this, the political landscape and social housing issues and property investors have become social pariahs across the globe.
This is why investments such as stocks and bonds remain so popular. They are easy to buy, easy to sell, their value is immediately understood and for those that are traded on the major exchanges, their value is immediately transparent.
Stock market investors need to look for a number of giveaways that will impact their investment growth potential, including the Total Expense Ratio (TER) also known as the Ongoing Charges Figure (OCF). They need some understanding of risk and diversification but beyond that, they should also keep in mind the relative ease of buying and selling assets, and remember to keep an eye on trading costs which will negate growth. That said, the power of the stock market for investment growth potential is significant for ordinary investors.
Property can never really match the stock market for long-term returns
Which is a pity as so many Irish investors still have a massive affinity to it. It’s retro, a condition of our culture that appears slow to change as demonstrated in the Detroit Property Fiasco, where a licensed and supposedly seasoned investment adviser got the basics of investing so wrong…and lost millions of Euro in client money in the process.
There is a growing debate as to whether Warren Buffet and mega money managers like Vanguard are right when they discuss investing strategies.
And in case you might have missed that debate, the central issue is fees.
Passive investing supporters like Buffet and Vanguard founder, Jack Bogle argue that there is no benefit to the investing public when it comes to paying too much money over to ‘active’ investors. Those are the guys that spend a lot of their time buying and selling stocks and bonds in order to ‘beat’ the market and generate a higher rate of return to their customers.
Bogle and Buffet believe it is more profitable to take a less active approach, a passive approach. They argue that it is impossible to beat the market long-term and those that do only do so for a very short period of time, their luck runs out and over time, their rapid fire buy-sell approach actually costs investors huge sums of money unnecessarily.
For Buffet and Bogle, the math is overwhelmingly in their favour.
When I talk to investors and students, explaining the concept of active and passive investing can be a little daunting. At first, I tried to simply present the maths and while this worked in offering the science, it didn’t fullyy explain the real difference between the different approaches.
While out on a run, I experienced the difference.
It was about 7pm and traffic was heavy.
What I noticed was that I was getting to the next set of lights at the same time as two particular cars. This lasted for just two sets of lights. And this reminded me of another driving experience through Manhattan a few years ago. Provided you drive at a particular rate of speed, it is possible to hit a majority of green lights all the way from lower Manhattan to the top end of the island. This is passive investing.
When I did that drive across Manhattan, I noticed another car that sped from light to light. It got caught at every red light. And at the end of the cross-island drive, I was still next to it. The other driver was active investing; speed, spurts and stops and along the way, getting no further, using more fuel and probably risking a speeding ticket.
For some investors, there can be a certain romance in the concept of the Wall Street type adviser. But like that driver that dashed from light to light, they are usually more sizzle than substance.
When it comes to growing your money there are many investment options to consider. But when it comes to investing approaches, there are only two; active or passive.
The maths support a passive approach all day for the sheer size of the investment return potential over time.
At the end of the day, this is broadly the better option to securing more long term wealth growth…and putting money in your investment account (including pensions).
Frank Conway is a Qualified Financial Adviser and Founder of the MoneyWhizz, the financial literacy initiative
With the passing of the dark days of January, February brings a touch of Spring in the Irish air. And what better time to sit down and give some thought to your finances.
Learning about money should be a life-long process. And this is especially true today as more and more of us can expect to live longer yet have more financial responsibility when we stop working and earning a regular income. With both the State and employers scaling back from offering the traditional supports in retirement than in past years, how financially fit we are throughout life will set the stage for how well off we can expect to be. And it is financial literacy that will underpin this.
You are never too young, or old to learn about money, money management and how to improve your financial literacy.
In fact, financial literacy should be more than a passing fad. It should be treated just like physical fitness; a regular process of learning and refinement that will help those that are actively involved.
Following are some simple and practical steps that can support you in the continuous financial literacy journey:
1 Create visibility and keep an eye on your spending (and bank balance).
There is no doubt that modern technology has made it really easy to check in on your bank account regularly. It can be done from your home PC or your phone. So why not use the access to regularly check into your bank account balance and keep an eye on your spending as this can serve as a powerful way of keeping your spending in check. Use the information to track expenses, set goals and remain in track to achieving those goals.
2 Browse the finance section of a paper
Many journalists do a great job researching the market for all sorts of financial news, money-saving tips and best practice. This can range from tips on investing for retirement, cutting health insurance costs, buying a home and saving for a rainy day. So use their expertise as it can be a great starting point to getting great impartial money tips that could pay off handsomely in the long term.
3 Be humble and ask questions
People can be very hesitant to ask money questions. This happens where they can have legitimate questions but fear sounding ‘dumb’. There is NEVER a dumb question when it comes to money. Never! Remember, the worst thing you can do when it comes to your money is remaining silent. Talk, ask questions and speak up. If you don’t understand what compound interest is, ask! If you don’t understand what TER or OCF is, ask! Bye the way, they mean Total Expense Ration and Ongoing Charges Figure and refer to the costs that are applied to investments. The worst thing you can do when it comes to your money is remaining silent.
Frank Conway is a Qualified Financial Adviser and Founder of MoneyWhizz.org, the financial literacy initiative.