ARCHIVES - "Safe As Houses"

RISK IS A FOUR-LETTER WORD
Copyright © 2005 John Hopkins

In most international and local markets there is an important difference between speculators and investors. That difference is the level of risk they each accept.

Speculators are looking for large and fast profits. They do this by using their instincts—like buying in anticipation of rises in a particular commodity then selling when they think the rise has reached its peak.

There are huge profits to be made this way in shares, futures and in property. Sounds simple enough, doesn't it! The only problem is, if your instincts, timing and expertise aren't 100% accurate, then the downside can be catastrophic.

Since speculators are always gambling on the edges of the investment market they risk losing their money if their instincts are wrong. In the case of futures, they can lose a lot more than they originally invested.

Put simply, fast money usually has a lot of risk attached to it.

Investors, on the other hand, not only want returns on their money, they're looking for a strong degree of security as well. This security can be found in bonds, debentures and even shares, but the most attractive balance of security and returns is to be found in property investment.For this reason most major corporations and successful business people keep a large proportion of their total assets in property. Property is the safety net that will catch them if their other assets fall.

Effective property investment requires long-term commitment. In the same way that Rome wasn't built in a day, fortunes in property are rarely made overnight. But at the same time, it is practically impossible to lose your property investment portfolio if you have structured it properly.

Added to this is the fact that, in the long term, the value of property will always stay ahead of inflation. Very few other investments can promise this, regardless of how attractive their advertising makes them seem.

For example, an investment package may offer 14% interest on your money at a time when inflation is running at 7.5%. That seems like a good deal. But the real rate of return, that is, the return after adjusting for inflation, is only 6.5%

To make matters worse, you may have to pay tax on up to one half of the 14%. Remember that taxes aren't adjusted to take account of inflation. The result leaves you wondering whether it was worth making the investment at all.

With property, not only will the property's value stay ahead of inflation, you will only be taxed on the increase if you sell.

Therefore, astute investors use the increasing value of their property as collateral to raise more loans for further property investment. Each additional property will come faster than the one before it. And the investor's portfolio will become something many speculators can only dream about.

Again, what is needed is long-term commitment. But also the determination to buy only prime real estate.

Property is very forgiving. In the long term even an inferior property may give a pleasing return. But to maximise your investment potential, you should only buy the best property available at whatever level of the market you can afford.

That's why only ever buying prime real estate is so important—prime being the best 5-10% of property available in the marketplace at any one time.

A property investment portfolio made up of prime real estate is a guarantee of long-term financial independence—no risk.