Stay the course

03rd August 2007

Not many of us are turned on by the idea of 'getting rich slow'. But here are some reasons why patience pays off. Michaela Ryan.

Remember Veruca Salt, aka the girl who said: "I want an Oompa Loompa now" in Charlie and the Chocolate Factory? Well, if we’re really honest, a lot of us have some Veruca in us – we crave instant gratification.

Occasionally property investors get rich quick. But for most of us, it’s a case of sitting back for a while before the gains become obvious and the inner-Veruca might feel very impatient. She might even urge you to make a decision, impulsively, to make things more pleasant in the short-term.

So how can you get out of the Veruca mindset and into the mindset of 'staying the course'?

• Consider historical data - If you're influenced by short-term events, you’ll make yourself unnecessarily anxious. Historical data confirms that property values and rents have always gone up in the past.
  
  Best-selling property author Jan Somers has been investing since the seventies. She uses historical data to build her confidence. However "You shouldn't rely on those statistics to decide when or where to invest," she says.
• Take a long-term view - If you buy property expecting strong short-term gains, there's a reasonable chance you’ll be disappointed. With a long-term view there's a much lower chance of disappointment.
  
  "Long term is more than four or five years," Somers suggests. "I can't tell you the number of people who in the late-1990s and early-2000s had held on to property for four or five or seven years and said, 'look, nothing's happening and we’re going to bail out.' And they’ve bailed out and missed out (on significant gains)."
• Remember why you’re doing it - Goal setting 101. If you set a goal, write down the reasons why you want to achieve that goal. If you didn’t do this when you started investing, do it now. This is your 'big picture' – your motivation to stay the course. You can refer to it whenever you start to get impatient.
  
  You may be forced to make some sacrifices when you start investing, but if your big picture excites you, you'll be more than willing to do whatever it takes to achieve it.
• Know your risk profile - If you're prone to anxious worrying, look for ways to increase your 'sleep-at-night' factor. You can fix rates, hire property managers, get landlord's insurance. Whatever it takes for you to stay the course.

When not to stay the course Of course, it’s not always wise to blindly hold on to a property and 'stay the course'.

• Sunk cost bias - Colin Nicholson, author of The Psychology of Investing, warns against 'sunk cost bias'. It's when a person sees their asset in terms of the cost they sunk into it, rather than what it’s really worth.
  
  Somers gives this example: Assume an investor has made a poor decision somewhere along the lines. "And then they need some dollars for whatever reason; they're going away or they want to build their new house or put the kids through school," she says.
  
  "Then they say, 'this particular investment, I paid too much. It's going to come good soon and I can't bear to sell it at a loss. I'll sell one of my better ones.'
  
  "That's the worst decision. You have to cut your losses and get rid of the worst," she believes. But what if you don’t actually need those dollars? Should you ever sell up a poor performing investment just to reinvest the funds elsewhere?
  
  Nicholson says yes. He warns against seeing an asset in terms of the price you paid for it. He suggests it could be worth selling a poor performing investment if you can see an opportunity to invest in a rising market elsewhere. (Of course, you need to take into account the transaction costs and tax to make sure it will be worthwhile).
  
  On the other hand, Somers says if you take a long-term view, "time cures all woes".
  
  "In 1972, whether we paid $12,000 or $15,000 for a property is neither here nor there," she says.
• Personal priorities - When things go awry in one area of your life, cracks can start to show in other areas of your life. A stressful financial situation can put pressure on your relationship or your health, for example.
  
  "I think at the top of our priority list is our health. There's no question about that," Somers says. "If your health will suffer and you think getting rid of a property will help – even if it's just a psychological help – then you’d have to do it."
  
  Family and relationships are also right up there.
  
  There's no point achieving your long-term financial goals if you arrive at your destination without your health or your partner.
  
  However, Somers warns against making a hasty decision to sell.
  
  "Don't make the decision within 24 hours," she suggests. "Try all the things you haven’t tried before to release the pressure of property."
  
  For example, can you increase the rent on one of your properties? Can you shop around for a cheaper mortgage? If all else fails, selling might be necessary. You can always pick up where you left off once you get the rest of your life on track.

 

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