Remember the old adage "buy low, sell high"? For many, this seemingly simple strategy has failed to deliver on its promise of profits, particularly over the past year. Why? It isn't because it's bad advice; it has more to do with the fact that for most of us we tend to make our decisions based on emotion. Our confidence tends to build right along with steadily rising prices and trends. Thus, we tend to make our buying decisions while investment opportunities appear to be rising seemingly ever upward. And we tend to sell while prices are plummeting downward in an effort to "get out while we can" and stave off further losses.
Herd Mentality.
All markets, whether real estate, commodities or the stock market, tend to run in cycles. Our tendency to believe that markets will continue ever upward (or ever downward!) lead to what is often called the "herd mentality" (or what I sometimes think of as the "lemming approach to investment") where we see the largest influx of investment funds at market peaks and the largest withdrawals at market bottoms. In fact, the amount of funds withdrawn from mutual funds in 4Q, 2008 was at record levels. This, of course, results in "buy high, sell low" -- the opposite of most investment strategy goals!
Early Bird.
Most of us are familiar with Benjamin Franklin's quote regarding the "early bird" (you remember... something about getting the worm?). Well, recently Warren Buffet was quoted as saying, "I can't predict the short-term movements of the stock market... What is likely, however, is that the market will move higher... well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over."
Bulls Are Back?
Given that short-term predictions are extremely difficult to forecast, it can be safely said that in the long-term they will again move upward. In fact, after nearly two years of downward trends in the stock market, there are now a few cautious bulls at the gate. In the past seven weeks, the Dow-Jones average has risen over 23%, perhaps signaling what just may well be the start of the next upward bull market cycle. There are also signs that the real estate market has officially "bottomed" as well. Last month, in many parts of the country, both sales rates and prices moved upward for the first time in over a year.
Rational, Consistent Investments.
What investment strategy, then, tends to work the best over the long-term? According to many financial advisors, the effects of emotion can be taken out of the equation through an investment strategy of purchasing at regular intervals over a longer time frame. Real estate in particular has proven to be a consistent long-term wealth-builder. Consider a median-home purchased ten years ago, nationally on average, would have increased in value by over 50% -- that's even when you include the price drops experienced in many parts of the country this past year! The Seattle metropolitan market faired even better, experiencing a 73% rise even after adjusting for recent price drops.
Market cycles, market corrections and market trends will always be with us. Whether you believe in lemmings or robins, bulls or bears, now is the time to implement a new, successful long-term market and real estate investment strategy.
