As we commence a new year, many of us will be focusing on the times we've experienced over the last few years and try and extract the lessons we've learned.
Rather than do that, today I’d like to remind you of some of the foundational principles I use to grow my wealth.
Let's look at things that "always worked" rather than things that are working now.
Now to be clear… this is very different from most of what you hear in the news, which basically focuses on short-term investment trends.
You know... those headlines that we’ve been seeing so much of recently - the top 10 areas to invest in 2024, the top 5 lessons from 2023, what’s ahead for interest rates or where’s the next hotspot.
But just look what happened to all those forecasts made a year ago, and then the about-face all those economists had to make over the last year when their predictions were so wrong.
And it was much the same with the forecasts made in 2020 when Covid hit or those forecasts made at the beginning of 2019 when there was the spectre of a Labour election win and change the property taxes.
Again these forecasts are wrong.
And what about all those “Cliffs” that we were going to fall off – the unemployment cliff, the interest rate cliff, and the fixed interest rate cliff that didn't eventuate.
What came of them?
Just look at the financial section of the newspapers or websites and you’ll read about the recent resurgence in the price of Bitcoin, or that the Australian Stock market is almost at an all-time high.
But only a few months ago, gold was the flavour of the day.
And, who could forget the surge in the value of technology shares during the height of the lockdown?
These types of headlines lead to a short-term focus and encourage investors – or let’s call them speculators - to try and time the market or look for the next big trend.
But successful investing, like many things in life, is counter-intuitive and counter-cultural.
One of the core tenants of my approach to investment success is goal-focused and planning-driven.
And the good news is focusing on the long-term, big-picture trends removes the burden of correctly guessing future short terms trends such as interest rates, inflation, hot spots, and the many other variables that the average analysts and many investors spend their days obsessing over.
In a culture that tends to be market-focused and performance-driven, my approach sees our clients at Metropole, and also my personal investing, acting on a financial plan, a customised strategic property plan that we build for our clients, rather than reacting to the vagaries of the investment markets.
Being long-term focused means we invest in the type of property assets that have always worked rather than what's working now or what's going to be hot this coming year.
At Metropole, our approach is built on a number of frameworks that have stood the test of time and are proven and trusted as well as the following principles:
While it's easier and more trendy to be pessimistic, I believe that optimism is the only realism.
There are so many doomsayers out there, and I know because I regularly get trolled by them, particularly on YouTube.
There has never been as much information about how to become financially fluent in the public arena as there is today, however, there is just as much financial misinformation and this has made many people pessimistic.
By the way... I don't know a rich pessimist.
Yet based on history, I confidently believe in the ability of a capitalistic society to prosper on the back of our collective ingenuity.
And if the last few years didn’t teach you anything, they should have taught you that residential real estate in Australia is an asset class that is too big to fail.
Neither the Government, the Reserve Bank, or even the private banks are going to allow it to fail.
More than that residential real estate is a great asset class to use to build your wealth because it is underpinned by a large proportion of owner-occupiers, homeowners who would rather eat dog food than give up their homes.
And remember… 50% of these homeowners don't have a mortgage against their home, having paid it off a long time ago; and a large percentage of the other homeowners have paid off a significant portion of their mortgage.
Contrary to the financially illiterate, the strategic investor refuses to react inappropriately to disappointing events.
That’s why they have a plan to follow, and they act on this plan rather than the short-term ups and downs of the investment markets.
They recognise that wealth is the transfer of money from the impatient to the patient.
Similar to the principle of patience, discipline sees strategic investors continue to do the right things, even if the fruit of these decisions can't be seen in the short term.
Property investment is a process, not an event.
In fact, property investment is a long-term process and it takes up to 30 years to develop financial independence through residential real estate.
And all successful investors I know continue to educate themselves so they become financially literate, but they’re very careful whose advice they take because they've learned most educators and so-called "advisors" have a vested interest.
They also surround themselves with professionals and mentors who they are prepared to pay for advice to ensure they maximise their investment returns.
Yet while successful investors pay for their mentors the average investor gets their advice for free over the Internet, in blogs or on YouTube.
They haven’t learned the simple fact that the cheapest advice is the one that gives you the best investment results – and obviously, you’re not going to get that for free.
On the other hand, financially literate investors accept the guidance of their holistic wealth advisors and if they have sufficient disciple and allow time for compounding and leverage to work its magic, their investment success is all but guaranteed.
While simple, it's not easy.
And here's the 5th way I'll ensure my property investing is successful...
As you can imagine, I'm currently being asked:
What's ahead for property?
- by both our clients at Metropole and various media sources now that we're at the beginning of a new property cycle.
But I think I’m disappointing them with my answers because I tend to say something like:
A lot will happen over the next decade, but I don’t make forecasts - instead, I have expectations.
Now there’s a big difference between forecasts and expectations.
- I expect there to be another recession in the next decade. But I don’t know when it will come.
- I expect the property market to boom over the next few years and then prices will slump again. But I don’t know when.
- I expect that some investments I will make won’t do well. But I don’t know which ones they will be.
- I expect interest rates will rise. Probably not for a number of years. In fact, I don’t know when.
And I expect another world financial crisis.
But I have no idea when it will come.
Now, these are not contradictions or a form of a copout.
As I said…there’s a big difference between an expectation and a forecast.
An expectation is an anticipation of how things are likely to play out in the future based on my perspective of how things worked in the past.
A forecast is putting a time frame to that expectation.
Of course, in an ideal world, we would be able to forecast what’s ahead for our property markets with a level of accuracy.
But we can’t because there are just too many moving parts.
Sure, there are all those statistics that are easy to quantify, but what is hard to identify is exactly when and how millions of strangers will act in response to the prevailing economic and political environment.
Then there will always be those X factors that crop up.
Those unforeseen events that come out of the blue, which could be local or overseas undo all the forecasts we made.
I’ve found the most practical approach is to have expectations of what could happen without specific forecasts.
That’s because when you expect something to happen at some stage in the future, you’re not surprised when it happens.
Expecting the worst while preparing for the best forces you to invest with room for error, and psychologically prepares you for the inevitable disappointments.
This is exactly how I planned for the property downturn of 2018-19 and why I was prepared for the challenges of 2022.
I didn’t know when the property downturns would come, how long they would last, or how they would affect the value of my property portfolio or the cash flow of my business.
But I knew a downturn would come once again, and I was prepared for it with cash flow buffers to see me through the difficult times.
What I’m trying to explain is that there’s a huge difference between, “I expect another next property downturn sometime in the next decade” and “I expect the next property downturn in the second half of 2027.”
- Also read:What makes an A-grade property?
- Also read:Latest property price forecasts for 2024 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:Here’s how to avoid these 12 common reasons property investors fail to build a Multi Million Dollar Property Portfolio
- Also read:Sydney property market forecast for 2024
- Also read:Boom to bust: What makes property prices rise and fall
If I expect the property upturn we’re currently experiencing will be followed by another property downturn, then I won’t be surprised when it comes.
But since I don’t know when this will happen, I won’t make focus on my property investing trying to time the property cycle.
That’s because trying to time the property cycle or looking for the next “hot spot” are two of the reason many property investors fail.
On the other hand, strategic investors maximise their profits during property booms and minimise their downside during busts by investing in assets that have “always” worked, rather than looking for the next hot spot or for the type of property strategy that works “now.”
They own investment-grade assets in investment-grade inner and middle ring suburbs of Australia’s three big capital cities.
The type of property that keeps growing in value over time without fluctuating wildly in price when the property cycle slows down.
There will always be an X factor –
Strategic investors try and protect themselves by owning the best assets they can, by having financial buffers in place to ride through the ups and downs of the property cycle, setting up the right ownership structures, insuring themselves, and obtaining holistic advice from their consultants.
But the biggest risk is what no one sees coming because if no one sees it coming no one is prepared for it and if no one is prepared for it, its damage will be amplified when it arrives.
An X factor – an unexpected event - seems to come every year and a major one, one that “breaks the world” tends to come every decade.