Don’t feel too ‘bubbly’ about real estate

Are we all just a herd of animals?

I’ve written about the average investor and how they make the wrong decision at the wrong time, over and over again. This week, I thought I would add a twist by outlining, in point form, exactly what investors do wrong and why many people do poorly at investing, either in real estate, the stock market or whatever.

I think you will be amazed, and in the meantime I hope this week’s column will help you avoid some of the pitfalls that most others fall into. It doesn’t matter whether you are a GIC investor, or a stock investor. The pitfalls are the same, and the results are similar. Let’s take a look.

It is human nature that we want to follow the herd. Very few people will do what they feel, even if everyone else is doing something else. You’d think we were herd animals.

You know the feeling you get when there is an obstruction on the sidewalk, and everyone goes around the obstruction to the right. You feel funny going around the obstruction to the left. But who says you are wrong? You just feel wrong because everyone else is doing the opposite.

Now that we have established human nature, let’s examine some actual examples.

Emotions involved

Believe it or not, studies have been conducted that examine how well investors actually do in relation to the investments they are in.

From 1984 until 2000, the average U.S. stock fund did an average of 13.3% per year, whereas the average stock fund investor only did 5% per year.

How could this happen? Simple. The investors let their emotions get involved, and followed the herd; selling when the fund was low, and buying when the fund was high. Here is another interesting tidbit. Almost everyone was trumpeting index funds at the end of 1999, saying money managers couldn’t beat the market anymore.

Suddenly, an index fund became the largest fund in the world. What happened? Well, of course, when the market collapsed in 2000, index funds (which follow the markets’ rise and fall) collapsed as well.

Let’s look at another astonishing but true fact. The greatest amount of money that ever went into stock funds in one month was in February 2000.

Almost 80 billion dollars went into stock funds that month. Of course, two weeks later, on March 10, 2000 the market peaked and collapsed thereafter for the next three years.

Now, if you were set up correctly, according to a plan, with proper diversification you could have limited your losses greatly. I pride myself on the fact that most of my clients were spared the huge drop in the market because I set them up properly, with a good plan.

Tip of the Week

Were you feeling a bit bubbly? ‘Bubbly’ was how one of the foremost market watchers in the world described the real estate market in the U.S. a couple of years ago. Robert Schiller is a Yale professor, and author of Irrational Exuberance, which forecasted the stock market bubble and subsequent bust. This very high real estate market in North America was a function of low interest rates, creative mortgage financing, and irrational expectations.

Remarks abound like “You can’t lose in real estate,” and believe me when these types of remarks become the norm, markets are bound to fall. Professor Schiller, interviewed recently on Report on Business television from his office at Yale University, went on to pick out Vancouver, B.C. as having one of the most out-of-line real estate prices in the world. The U.S. market has already collapsed, but here in Vancouver we think we are special.

Well, we will see.

For more information, please contact Bob Thompson at 604-643-7743. Dollars and Sense is a regular column appearing in the Leader.

Bob Thompson is an Associate Portfolio Manager and Senior Investment Advisor at Canaccord Capital. Canaccord is a registered investment dealer in BC and a member of the CIPF.