The National Board of Realtors reported that average home prices have finally returned to their 2006 pre-crash highs. That means theoretically speaking, that if you bought a home at the peak you are now back to even. This good news for the housing market is also a sober reminder of how long it can take to recover from a bad investment.
In an effort to chase hot returns, investors sometimes make mistakes that take years to recover. The math of investing works against you when you lose, meaning that if you are down 20% it takes more than a 20% gain to get back to even. With the stock market at an all-time high, it might be a good time to make some new year’s resolutions to help avoid another painful future event.
As I have stated before, I think 2018 has some big positives in its favor, but that is no reason to let optimistic expectations tempt us to abandon some basic principles of investing. Doing so is often the very essence of what precedes a crash. So here are some principles we might want to resolve to follow this year.
1 -Avoid investing in things you do not understand. New technologies are very tempting but remember the dot.com bust of 2000. Some of those companies have become huge but most of them disappeared. Be very careful as you delve into new investing ideas, no matter how much others may appear to be making on them. Understand the risks before you invest.
2- There is a reason why advisors have recommended for ages to follow an intelligent asset allocation plan, also known as diversification. Although diversification does not guarantee less risk, it has historically shown an ability to help weather market storms. During hot markets, many start to develop an “everything on red” attitude. If you do this you move from being an investor to a gambler.
3 – Think very carefully before borrowing money to invest. Mortgaging your home for speculation may not end well.
4 – Don’t chase returns. Don’t invest based on how well something did last year, or even last week.
When markets are hot, investors need to be aware of the risks of becoming over confident. Investing always requires careful thought and firm discipline, but great markets tend to make everyone think they are an expert. Be aware of the risk that greed may sneak in to your investment decisions in times like these.
The housing crash of 2007 was largely the result of a booming real estate market that investors allowed to get out of control, as they got caught up in the excitement. Today we see a similar situation developing in several investment markets. Investors will certainly want to thoughtfully consider the opportunities that exist, but with a keen awareness of the power greed has to overcome common sense. As we say in our office, “Be Wise,” especially in 2018, and stay true to the investing principles that got you here.
Wyson Financial | Wealth Management in Southern Utah
Financial Planning and Investments
