Emotion can ruin sound investment decisions, says Michael Beresford of OpenCorp
Emotions can get complicated. Being ‘in touch with your emotions’ is seen as a good thing. If a politician gets emotional, we warm to them – they’re human, just like us. In some sports, controlled emotion can be channelled into success.
So, it’s good to be emotional, right?
Wrong – at least, not when you’re buying property.
If you’re about to spend a big chunk of capital on an investment property, a cool head is a prerequisite. Ever been to a weekend auction? Every emotion from elation to disappointment (even outright despair) is on show. That’s what real estate agents want buyers to experience.
Emotion leads you buy at the top of the cycle, rather than following rational thought, which tells you the bottom of the cycle is better.
I ask clients: “If you can pay $1.25 for petrol or you can pay $1.45 for petrol, when would you rather fill up?” Everyone says when it’s $1.25 – of course. However, 99 per cent of investors do the opposite when it comes to property.
Investors can be derailed by emotion, by listening to the white noise that exists around the property world. There’s a lot of people with a stake in that world, and many have vested interests.
It could be newspaper headlines about the latest boom suburb. Stop and think about it. Granted, it makes an interesting story. But media organisations are also heavily reliant on property advertising – and associated businesses, such as DIY, interior design or whitegoods.
You know that nice glossy supplement full of perfect houses and home-improvement tips? It wouldn’t exist without advertising.
That ‘white noise’ could also come from well-meaning family and friends with some firm opinions. Look closely and that double-digit growth suburb could be a blip, with underlying connectivity problems that will limit future appeal.
If your investment is driven by emotion, you’re far more likely to be distracted by the next big thing, or a ‘bargain’ your mate tells you about. This may lead you to invest in property that doesn’t align with your investment strategy.
At OpenCorp we focus on three main ways that emotion can affect poor investment decisions – and help our clients to avoid them.
1 Don’t buy at the top of the cycle
It may seem obvious, but there’s an emotional factor that pushes people to buy at the wrong time – FOMO (fear of missing out).
Analysts may talk about average growth rates in property, but property prices don’t grow in an average fashion. They go through a growth phase, when growth is fairly rapid. They have a minor correction and then a stabilisation phase – and each of those phases roughly fit into a 10-year cycle.
Emotion comes in when people feel there’s quick money to be made. As a result, they’re following the headlines, and it’s the boom that’s never going to end. And that’s when markets are at the top of the cycle. So, if you’re investing for growth, do you want to be coming in at the bottom or coming in at the top?
2 Beware of a lack of diversification
By getting emotional, investors buy in areas that they know, or areas that they like, rather than areas that make sense, with market cycles at different points in time.
Let’s say that you have a portfolio of three investment properties. If they are all in one capital city, your capital growth outcome is dependent on what’s happening in that city at any point in time. If you had one property in each of three different capital cities, then you’re getting exposure to three growth cycles and getting a much more consistent result over time, because the chances are at least one of those markets is on an upward trajectory.
3 Don’t pay too much
Again – this may seem like common sense, but I bet everyone reading this knows someone who bought high then the price stagnated.
A big mistake that investors make is buying at auction. Why would you want to pay more than anyone else for a property if it’s about the numbers? And auctions are all about getting emotionally invested, because you really like the property. If you bring a laser-sharp focus to process and criteria, then you know the point where it no longer makes financial sense.
Follow those three rules and you’re a good part of the way towards establishing a profitable investment property portfolio.
At OpenCorp, we help clients to understand what the actual drivers of markets are, and how to mitigate the risks.
By influencing the process, our clients are crystal-clear on what their investment goal is, and what’s required to get there.