Investor Alert: Is timing the market really that important?
There’s much talk at the moment of where Perth is at in terms of the property cycle. Some say we’ve reached the bottom and are heading into the upswing phase, others are less optimistic and are wondering whether things will get worse before they get better.
To me, it seems there is an obsessive focus out there on timing the market. People want to know if now is the best time to buy, or should they wait a bit longer for the market to potentially fall further? While I think the property cycle is indeed relevant to investors, the reality is that it is not the be-all and end-all that many seem to think it is.
Yes, I agree that buying low and selling high is obviously the ideal way to maximise potential profits. But predicting the perfect time to buy (and sell for that matter) is difficult if not impossible, even for experts. Timing the market is a strategy that is really only critical for those who are investing with a short-term focus, and I must say, this is not a route I would recommend for most investors because it is risky and very few people do it successfully. In fact, this strategy is what I'd call a speculative buy as getting the timing right on both ends over short periods of time could mean the difference between making a profit or suffering a loss. The other problem with this strategy is a lot of people become overcome with this fear of buying at the ‘wrong’ time. They end up delaying and delaying and sometimes not buying at all, and this time out of the market is more financially detrimental than buying even when the market’s hot.
If, however, you’re like most investors and planning to hold the property for a reasonable period of time, ideally at least one whole property cycle, then timing the market is far less important. If you look at historical trends over the past 100 years or so, property prices have always moved in an upward fashion despite some rises and falls along the way. Any price differences from buying a property at the ‘wrong’ or ‘right’ time prove to be insignificant to your profits over the long haul.
Of course, that doesn’t mean that long-term investors shouldn’t pay any attention to the property cycle. As I said, while it’s not as important to your bottom line over time, it’s still advantageous to try and buy at the lower end of a cycle to maximise your potential returns. It also provides more protection for you in the event you may have to sell earlier than planned.
As far as the Perth market is concerned, all signs point towards the fact that now is probably one of the better times to consider buying. Whether it’s the absolute bottom or not or whether prices are about to shoot upwards, nobody can say for sure, but to long term investors it doesn’t really matter. It’s clear you’re not buying at the peak but at the lower end of the cycle and that’s good enough. Any slight variation in a property’s price up or down right now, will have negligible effect on your returns long term.
With all the fuss about timing the market, it seems to me that many people forget the most important rules of property investing. What’s far more important than timing the market is buying the right kind of property. Buying a poor quality “bargain” property in a lagging market is unlikely to perform as well over time as buying a good quality property when the market is stronger. The poor quality property may not attract the best capital growth and it’s likely to suffer most when the market takes a turn for the worse. Time and time again it’s been proven that the right kind of property will always trump the wrong kind of property no matter when you buy.
Therefore, while you should take note of the property cycle it’s not the most important determinant of returns. The quality of the asset is so although you may be buying when the market’s a bit flat and thus thinking there are plenty of good deals out there to choose from, you’re wrong. You can’t buy just any property and expect it to make you wealthy. In fact, you may be surprised at to just how few properties actually make the grade as “investment worthy” properties. When we help clients to locate an investment property, we exclude 96.6% of properties we come across leaving just 3.4% as potential candidates.
While it would be nice to be able to buy the perfect high-quality investment property at the right time and eventually sell it at the right time also, this is unrealistic for most. Getting the timing right is near on impossible, but what you can control more easily is the quality of property you purchase. My advice would be to keep an eye on the property cycle and ideally try to buy somewhere at the lower end, but never at the expense of the quality of the asset. It will always be better to buy a high quality property at a premium even at the peak of a market, than buying a poor quality “bargain” property in a depressed market.
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