06 Nov The Best Investment?
At one time or another we’ve all been mental mathematicians.
Usually it’s when we have to justify something to ourselves on nothing else but face value.
Ask any financial adviser and they’ll tell you they’re often given jovial cheek that property is unbeatable and the best investment a person can make is their home.
Financial advisers will also tell you they wish they’d carried a calculator on a more regular basis, if only to illustrate why some mental maths arguments look impressive on face value and decidedly average against real scrutiny.
The example argument often goes, “I bought my house for $40,000 in the early 80’s and it’s worth $280,000 today.”
Shares then find themselves dragged in with the claim, “you don’t see that sort of return on the share market with all the crashes.”
If you’ve used a similar argument, you might want to grab a stiff drink.
$40,000 invested into the ASX Accumulation index (calculating reinvested dividends) in January 1983, would have grown to $1.379 million by the end of January 2013.
Only about a million more than the house!
And this is before rates, insurance and maintenance costs are applied to the house, but we’ll keep this on face value.
However, I do keep preaching the benefits of diversification.
So here’s a more realistic scenario of that $40,000 invested in a portfolio with 70% risk assets such as shares and listed real estate, with 30% defensive assets such as fixed interest and cash.
January 1983 to end January 2013 and that $40,000 would have grown to $1.019 million invested in such a portfolio.
Unfortunately, you don’t hear about these kinds of returns very often.
It’s not that they aren’t available; it’s just people find themselves chasing the returns of mental mathematicians, while ignoring the ongoing returns of capital markets.
Successful investing requires patience and discipline; sometimes it also requires a bulldust calculator!