Can you take volatility and remain invested through the ups and downs in equities?
A good friend called to check how to invest in mutual funds. I was surprised since she invests mainly in property. Let us call her X. So X let out her apartment to a single woman with an eight-year-old son and a widowed mother. The tenant paid half the advance amount and requested X to allow her to deposit the balance in a few days. Given that someone had referred the tenant, X agreed to do so. The second cheque bounced and the tenant did not pay the monthly rent. X followed up with her for two months but to her dismay, she did not clear the dues. X had no option but to send her an eviction notice along with a cheque bounce notice. When she realized that the cheque bounce could get her arrested, the tenant agreed for a settlement. In all this, X received the rent for the period the tenant stayed but had to bear the lawyer’s fees and other charges. To me, X was looking at investing into equities as a knee-jerk reaction.
In my experience, the choice of an investment is driven by two factors—the inherent views on the investment and experience while being invested in the instrument. For generations, real estate has given double-digit returns and buyers are ready to go through the laborious and time-consuming process of investing into property because they expect to make huge returns. Psychologically, the presence of a physical asset brings peace to many. Most people who have invested in real estate even as of five years back have seen single-digit appreciation in prices and believe that it’s a matter of time before they are back to double-digit returns. As such investors are not perturbed by issues that come with property investments unless they are very grave in nature such as the builder not giving possession of a flat or dealing with a squatter. Compare this to investing into equities. Firstly, most investors tend to make all the possible mistakes while buying stocks or funds. They choose the previous year’s best performer, enter at highs based on a friend or family member’s advice and usually expect very high returns in short periods of time. And when this doesn’t happen, they exit at a loss. This bad experience results in the preference for real estate over equity.
Further, many investors do rightly mention that choosing stocks or even a mutual fund confounds them as it involves much more difficult research and reading up which is not the case with real estate investments.
These days, especially in urban cities, there are many Gen X and millennial investors who are not enthusiastic about buying a second property for investment. Not only is it difficult to manage a second house because of limited time but also experiences with renting are turning people off. If you are one of those who is confused whether to choose equity or real estate, here are a couple of things you need to assess.
1) Are you buying the second property on a loan? If yes, it is not worth it because the interest costs will offset gains from the property.
2) Do you have the time to manage the property, especially if it is far away from your house? Or are you willing to spend your weekend on house-related matters?
3) Do you have resources in case of problems like the one X had? Engaging lawyers and making rounds of the court is not only time-consuming but the costs also add up. Further, do you have mind space to tackle these matters?
4) If you are considering equity investments, do you have a financial adviser who can assist you? You certainly need a helping hand but are you willing to pay for it?