As a property investor have you ever wondered – what is a long-term investment?
If you ask people what they might consider to be a short, medium and long-term investment, they will probably say something like:
Short term – one month to 12 months
Medium term – more than 12 months
Long term – five years or longer
Can humans predict the future?
Am I being too outrageous if I say that humans cannot predict the future accurately?
I don’t think so.
There are more than enough examples to prove my point. Yet what do you see when you turn on the news or the internet every day?
“Stock prices will moderate ahead of the fiscal cliff. Property prices are going to ease in December due to debt stress. Interest rates will be cut twice by July 2013. We should definitely be short the Aussie dollar but long on gold.”
Humans love to make predictions but it is absolutely crystal clear and beyond the shadow of any doubt that we are no good at them.
So therefore does it not follow that any ‘investment’ which relies upon the asset price moving in our favour over any time period under at the very least a couple of decades is to some extent just a guess? Or worse, a gamble?
Longer term predictions
Over the longer term (see my definitions below of what I consider to be long term) some things are reasonably predictable. Company earnings will move higher. Property prices will increase. The currency in our pocket will be worth less.
Although even these outcomes are not 100% certain, they are nevertheless extremely likely in part because the Reserve Bank in Australia is actually planning for it to be so.
Central Banks and governments today are well aware of the dangers of deflation and will therefore fight tooth and nail to maintain a steadily inflationary economy. They will print money, and, if required, they sometimes even just give it to us to spend (cf. Rudd’s stimulus package).
Let’s refer back to my 100 year Dow chart:
That – right there – is the direction of asset prices. Up.
Not volatile. Not flat. And they certainly aren’t heading down. Just up.
But over the short term neither you, nor I…nor indeed anyone else knows what they will do. Nope, not even those aggressive-sounding, tiresome know-it-all commentators who insist so adamantly that they must be right.
What is investing?
These are my more realistic time horizons for investment:
Short term – one decade
Medium term – 10 years to your lifetime
Long term – your lifetime and beyond your own lifetime
Of course, we’ve already established that we can’t predict the future, and therefore the length of our life is unknown. But we can certainly take a reasonable guess and work towards that.
Investing does not focus upon the immediate price action of a security or asset. Instead, investors focus on the fact that over the long term – yes, that’s a lifetime – their assets will generate them both income and capital growth.
Thinking beyond your lifetime
Although the concept of continuing to steadily build an asset base over time is simple to grasp, the mindset is not easy for many people to accept. In fact, for most it seems to be a totally alien, almost abstract concept.
“You can’t take it with you. You’re only young once. I plan to spend the last dollar on the day I die. I’ll take the lump sum on a SKI holiday and then live off the state pension, me!”.
Unfortunately, the average superannuation balances at retirement ensure that for most, drawing the meagre Age Pension is the only option that remains.
If you aren’t sure how much the Age Pension is (or isn’t) likely to pay for, take a quick look. About 380 bucks per week including the supplement. OK, my view is jaundiced for living on Pitt Street but 380 bucks a long way in modern day Australia does not go.
We need to able to move beyond the idea that money is simply something that we earn and then spend. Instead, a portion of what is earned should be donated to charity, some should be spent on moderate living costs, a reasonable buffer saved for emergencies and the remainder invested for the future.
Through first grasping and then embracing this very simple concept, the results over a lifetime of application that many perfectly ordinary individuals achieve can be beyond staggering.
Spend less than you earn and buy assets with the difference. But what will happen to Australia’s stock markets and property markets over the next five years? Rhett Butler said it best in Gone with the Wind: “Frankly my dear, I don’t give a damn.”
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