The property market is hot. The worst thing you can do is sit on the sideline and do nothing. The second worst thing is to buy the wrong property and spend the next 10 years regretting your decision. The best thing to do is relax, research, prepare and build a rock-solid plan that allows you to live the life you want while growing your investment portfolio.
Millennials are leading the way with rentvesting, and there are other ways today’s investors are thinking about property compared with their parents or grandparents. But before that, it’s important to understand the cyclical nature of the market. It is imperative to think of investing in terms of cycles. It is an important framework that will save you from making mistakes at the top or bottom.
Even with all the available strategies and tools, if you don’t think in cycles, you’ll be consumed by emotions and eventually succumb to peer pressure, often leading to mistakes.
A time for everything
The world moves in cycles. We have cycles of time – days, weeks, months, years. We have different seasons – a nitrogen cycle, carbon cycle, photosynthesis, and the water cycle. Around 2500 years ago, according to rabbinic tradition, King Solomon wrote “… there is a time for everything, and a season for every activity under the heavens…” (Ecclesiastes 3). As many of the proverbs borrow from Persian and Greek writing styles, so scholars believe the work could be dated even further back in history.
I’m a big believer in investments also following this natural occurrence and moving in cycles because, at the end of the day, markets are driven by human beings and our natural habitat. I view every investment decision I make in the context of a cycle.
The hard part is picking cycles. It’s very difficult to predict where we are. For example, the residential real estate cycle in Sydney has generally fluctuated between seven and 10 years, when you have a boom at the top and pullback at the bottom. Timing is difficult because booms or pullbacks may last longer or shorter than expected. The same can be said for stock markets and movements in the price of gold, silver, and other metals.
Some investors like predicting cycles, using technical measurements like charts and data. I’m not completely sold. As an investor, I like to keep things simple. I’m not too worried about being precise; I’m more focused on understanding where my competitors are and what type of market sentiment is prevalent in the current cycle.
So where are we now?
I recently came across a great note from an experienced investor who pointed out that post-war commercial real estate returns have averaged around 8%, so any asset that has grown by more than 8% in the past decade will probably see a sub-8% compound rate of growth in the next decade as markets revert back to their historical average.
A smart guy, he runs a multibillion-dollar fund. Big investors trust him and his team with their money. So this is really important.
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