In the world of investment, your mindset remains one of the key factors that separates good investors from the rest.
A good investor doesn't need to have a crystal ball in from of them but having a grasp on what & why you're investing is critical. In the timeless words of Warren Buffett:
Risk comes from not knowing what you're doing - Warren Buffett
In recent times, we have seen massive rises in property prices across the country as well as a drop in prices too.
This volatility has caused some investors to get spooked or shy away from the big picture.
A low-interest rate environment was one of the main drivers for price rises over the last year or two and as these interest rates were raised (in conjunction with the CCCFA), prices dropped.
In 2021 when prices were rising, investors were bullish on the outlook for the market and had confidence that their commitment to property would reward them in time with capital gains.
Then, when prices started falling, investors lost confidence and their outlook became bleak. All of a sudden the confidence of the preceding year was gone and property investment seemed like something of the past.
The Real Estate Institute of New Zealand (REINZ) reports that New Zealand has seen, on average, 6% capital growth every year. This data was taken over many years, including the global financial crisis period.
This tells us that even despite political, societal, and financial headwinds, property investment has performed remarkably well over the long term and so even when times are tough, investing over the long term is still where investors make the majority of their money.
There will always be small rises and falls but over the long term, the investment still stacks up well.
How does this relate to investors in the current climate?
A lot of investors tend to forget the past and only focus on recent events in order to drive their decision-making.
This is called the "availability bias".
The availability bias "is a cognitive error identified in behavioral economics whereby people incorrectly believe that recent events will occur again soon".
People tend to put greater impotence on information that is recent and this clouds their decision-making process.
For real estate, this relates to investors making their investment decisions mainly based on the information that is being reported to them at any given time.
So, when the market was going up quickly, people tend to think their investments will continue to grow at this rate infinitely. And, when the market is slowing down, people tend to think their investments will never recover the losses.
For instance, if the news is reporting that interest rates are very high and property is an unachievable investment, people often use this information as most relevant and it takes away from a rational thought process.
Looking at real data, it's clear that interest rates had been on the decline for a long time and this is part of what fueled the rapid house price growth.
In fact, mortgage rates in New Zealand have been 5.91% on average for a fixed 1-year rate since 2004 so what we're seeing now is less unprecedented rates and more normal proceedings.
Despite this, the availability bias strays customers away from looking at historical data and focuses them on new, potentially unhelpful data.
Circling back to the opening quote from Warren Buffet. Risk is associated with investing blindly, and without the right information presented to investors, that's exactly what they're doing.
That's why when it comes to investing your money, you are always best to seek advice from experts in the field who can guide you through real data and help you secure the best investments that are appropriate for you.
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