personal investment blog

Understanding

Rule 2: Never invest in anything that you know that you don’t understand.

I would like to put this more strongly i.e. only invest in things that you understand but this is too demanding. There will always be things that we don’t know that we don’t know, as D Rumsfeld pointed out.

Many home owners in the UK think of themselves as great experts in local property prices. In fact, the propensity of dinner party guests in the London area to talk of little else was something of a joke in the 1980s. There have been two golden periods in UK property in the last thirty years when homes doubled up as necessary living costs and investments. Such was the self-confidence of the property owning class that estate agents became something close to figures of hate. They were seen as greedy types who charged too much for services that were adding little value. Contrast this with conventional savings and pensions where Average John is often happy to declare his ignorance – they are dull topics compared to property porn and AJ is too interesting a chap to bother with them. More often than not, he will suffer the “professional” financial performance that his attitude deserves.

While the idea of living costs simultaneously contributing to savings is very alluring and was very successful for a long time in the UK and elsewhere, it can cut the wrong way. If property prices enter a period of decline, home owners will be literally staring at their own falling savings on a daily basis. The idea that a mortgage-free home for a couple of a certain age will become a pension is alluring but it carries risks like any other investment. To turn your house into a pension you need to sell it aka “downsize”. What happens when the baby boomers all need to downsize at the same time?

To understand a property as an investment you need to be able to compare it to other kinds of investments – not just to other properties. This means that those conversations in which it is assumed that because number 38 sold at a very good price, all the other 119 houses in the street are worth the same, are not good enough.

Rule 3: Do the work