QUOTE (patbb @ Sep 26 2008, 03:15 PM) Well, why diversify...
I think i started to explain in my previous post...
The point is how will you get the most money out of your investment; while limiting the potential risk of loosing it.
textbook definition of why diversify:
In times of market volatility, an important concern of most investors is the preservation of capital. In other words, the desire to protect an investment from downside risk rather than achieving outsize gains rises to the forefront when investors witness significant volatility. Ideally, a well-planned investment strategy is equipped to minimize damage to the portfolio in the case of an unforeseen downswing. Key to minimizing portfolio risk are discipline and diversification.
>is this a better investment ?
Obviously if your goal is to have a sound investment strategy and limit the risk to your investment, then the answer is a screaming yes.
>has the stock market bottomed ???
Strange question, you do not need the stock market to "bottom" to invest in it, just like you do not need the real estate market to "bottom" to buy a house.
Obviously I would wait until the american (and canadian) economy to stabilize before investing in it; unless you want to short sell stock; but that still leaves you with the rest of the world to invest with.
If you had live in the USA before the credit crunch, and you own 1 or 2 investment property.
let`s say $500k.
Today you are probably left with $200k.
If you had a diversified portfolio (worldwide), today it would still be probably around $450k in value.
Also it is much easier to bail out on some sinking stock than bailing out on a house; helping you to limit the losses.
>why diversify if you know what you are doing?
If you knew what you were doing you would probably be diversified.
All the eggs in the same basket is a very appropriate figure of speach.
I do not understand how can someone cannot understand this.
If you put all of your chips on the same number, you might win big! but you might also loose everything.
I think the problem here, patbb, is that most of us on here (at least the REIN members) do have experience/knowledge about investing in stocks and mutual funds, and we realize why real estate is generally a better investment. Not only does it have the advantages of leverage, which magnify the ROI`s past those of stocks or mutual funds on a consistent basis, but it is a much more secure investment. The day after bombings in Europe, the stock market dropped as a large percentage of stock investors (I`d guess most investors, but I don`t have access to the numbers to back that up) invest primarily on emotion. However, those bombings on another continent didn`t affect the RE market, as it is much more stable, and geared for the long term, generally speaking. On top of that, the banks (generally considered conservative institutions) won`t give the average person $100 000 to invest in stocks or mutual funds, as they know that those markets are quite risky. However, with a bit of background work, the average person can get a mortgage for $100 000 fairly easily (all things considered), as the banks know that real estate is a more stable, more conservative, and overall safer investment.
Now I, and probably most people here, would agree with you on the importance of safeguarding your investment so that the losses are minimized. What we`re disagreeing on is the best way to do that - not the easiest way, the best way. With stocks and mutual funds, owners have very little control over how their investment does. I mean, you have control over when you buy and sell them, but the only way you can exert any control over how your stock in Coke does is to buy 1 000 cases of Coke a day, which would probably be detrimental to your health. With real estate, you have much more control over your investment, which is one of the ways we safeguard it.
The other way, and arguably the primary way, we protect our investments, is by carefully studying the economies where we invest. If our way of choosing a town, or a property, to invest in was to throw a dart at a map and buy whatever it hit, then yes, you`d want to diversify, as you`d just be leaving your actions up to chance (which is what most people do when they invest in stocks and/or mutual funds). However, as sophisticated real estate investors, we carefully analyze where we`re going to invest, to ensure that we`re investing in a strong economy with a predictable future. By studying real estate busts, booms, and overall markets, it has become apparent that there are certain factors that drive markets up, drive them down, or leave them flatlining. So, we invest in markets that have a majority of upward-moving factors. By analyzing these fundamentals, and investing in areas that demonstrate solid economic futures, we are protecting our interests much more than the majority of mutual fund holders who only know how to diversify.
And that`s why your analogy of betting all of our chips on one number doesn`t hold water. We`re not betting on chance, we`re acting on solid, proven information. Or, if you prefer, think of it this way. You are still playing roulette, but you discover that someone legally came up with a way to place a strong magnet under number 5 on the wheel. People have been tracking the history of this wheel, and the metal ball has landed on 5 in 99% of the spins over the last 40 years. Personally, I would have no problems placing a large percentage of my meagre funds on number 5, as historical trends and current information have proven that this is where the smart money is made. It`s no longer random, but is instead a prudent choice.
As for your comment about not understanding why people would want to place all their eggs in one basket, Thomas had already alluded to that. None of the world`s richest people diversified on their way to the top. They focussed their efforts very clearly, and monitored their results carefully. Gates, Buffett, Soros....none of them tried to watch 30 different things at the same time, as they knew that would be a silly way of approaching wealth-building. I believe it was Buffett that said, "Put all your eggs in one basket, but watch that basket very closely." In all of my endeavours to improve myself, I have learned that it`s much more efficient to model the behaviours of those that are much better at that aspect than I am. That`s why I prefer to listen to proven experts talk about how they got where they are than to other people that are approximately at the same level as I am.
So, those are just a couple of the many reasons why the majority of people on here will disagree with your sometimes-condescending remarks. Your advice would probably be very sound and very appropriate to the average person investing in stocks and mutual funds, the person who doesn`t know how to adequately do their due diligence and who, more importantly, doesn`t want to take the time to learn. Those people should diversify, as it is the easiest way to protect their investments. (And let`s face facts....the average stocks investor isn`t even Jimmy Buffett, let alone Warren!) But most people here, having analyzed various segments of the Canadian real estate market, have moved past the point where that advice is relevant.
Hopefully that clears up some of reasons why we disagree with your opinion on a few topics, but if it doesn`t, feel free to question us some more!
Have a good one, all!
JohnS
