Buying your Home, Investment Property or Building a Share Portfolio

Buying your Home,  Investment Property or Building a Share Portfolio

This is an old discussion especially in Australia where buying your own home is the Australian dream. What I plan to cover here is some myths, and provide some raw data and thoughts to help you make a decision on if you plan to buy a property for investment and or build a share portfolio.

Looking at the chart below we can clearly see that CPI adjusted returns for buying property in the US. Since 1975 your return is only 30%. Obviously a very poor return on investment if that is why you are buying the property.  Meanwhile you can see that the Australian property market was stagnant till about 1995-2000 from where it took off. The Australian property market since 1975 has risen 181.5%. Based on 39 year time frame this means that the average return P.A for the US market is 0.69% and the Australian annual growth rate is 2.76%.

Formula used: =((End Value/Start Value)^(1/(Periods - 1)) -1

When we look over the same time period for stocks we can see that the Australian Stock Market increased in value about 6.7% and the S&P500 had an increase of 7.59% P.A. A considerable difference.

To give this all some sort of perspective if you earned 6.7% from your investment per year for 30 years with a starting balance of $40,000 and no other contributions this account would be worth a touch over $279,000. If you earned 2.76% over that same time period your 40,000 would be worth $90,000 and change. What a massive difference. This is the power of compounding and being aware of what real returns are available. A difference of 3.94% P.A. made a difference of $189,000 or 210%.

I guess the point is that buying investment property can have the figures worked to prove it is a myth and not a good investment as shown above. If you go to a property seminar they will easily show you growth rates of 10% etc. It is easy to manipulate figures but you can see from the CPI adjusted property prices if someone is telling you it is above 3% p.a. they are not being realistic and your dreams will be over promised and under delivered.

I have noted it multiple times that buying a property does not guarantee any sort of wealth, what it does guarantee is that you have a high probability of keeping up with inflation and that is about it. When you buy property, you need to look and invest in property with the strategy of cost basis reduction. What I mean by that is when you buy property you need the ability to reduce your cost basis, by ensuring the property is subdivisable, or maybe you are buying the house cheap so you can fix it up and the equity difference ensures you have significantly reduced your cost basis. There are other ways to do this but I am sure the point is getting across.

My biggest problem with property, outside of the numbers provided above, about the low rate of return, is the lack of ability to have real transparent pricing and real cost basis reduction strategies. What I mean by that, is that with the stock market, once you have completed your analysis and are ready to trade, there are multiple instruments that you can use to invest in that particular stock. If the stock goes against you, you have the ability to reduce cost basis by using options and/or reducing your break-even price through buying more stock. Property on the other hand, you can only do a renovation once, and you can only subdivide once and can only buy that property once. With property investing you get one shot at making the real money by reducing cost basis. As shown in the figures if you get your figures wrong, you can hang around for the next 30 years for your property to grow in value and keep up with inflation, but your still stuck with that one cost basis reduction strategy, and if the market goes against you, and your property reduces in value, all you can do is wait it out.

To put it another way;

If you decide to invest your deposit vs. use your deposit for your home this is how it would turn out.

Based on the medium prices of homes in Australia and Medium rent and current variable mortgage rates on the market, you can see there is difference between paying a home off and Renting. In the example of medium pricing the average home loan repayment would be about $2820 based on a 475,000 mortgage. The medium rent is $1860. If you used your deposit of $50,000 for investments in the share market, and added the difference between the home loan repayment and rent to your investment account, based on 6.7% that investment would be worth $2.3M and change after 30 years. Assumptions are that 6.7% is net after tax's.

Based on 20% returns, as shown that this sort of return can be achieved, those figures would jump to $35M and change, over that time period.

So after 30 years you can have a home fully paid for or have an investment earning you $154,000 a year. I am not endorsing this strategy, just pointing out that buying a house and home to live in is not all that it’s supposed to be. You can make your own decision on what’s right for your personal circumstances. Obviously the point here is that for a small capital outlay/deposit and regular ongoing payments to an investment account you can have a substantial capital and investment base when you retire. If you can combine this with owning your own home, this would be a good financial plan.

Note; I can only vouch for the formulas and figures I have put together. As I had no hand in putting together any CPI adjusted figures, we have to assume they are correct.

Using Volatility Instruments as a trading Instrument

Using Volatility Instruments as a Trading Instrument

The study is on how to profit from trading volatility instruments. Over the last couple of months due to the current market price I have been trading Volatility products, in the VIX, SVXY among others. In this blog I specifically want to write about the VIX and SVXY and how to trade these instruments.

There are a lot of articles and quality information on the internet about how they are structured and how they derive their underlying value so I have no intention of going into that space. What I want to go into is what to look for and how to trade these instruments.

The SVXY is inversely correlated with the VIX. The SVXY influence is from Contango which means it should have a positive drift due to that the contango affect which happens about 90% of the time. This article is not to describe any terminology, as there are a lot of articles already written on the internet. But rather I am highlighting these as an investment opportunity to hedge or add to your portfolio as a trade-able instrument.

Chart provided by yahoo.

When the SPY drifts up over time and where the environment will decrease volatility, the VIX will continue to fall, when the SPY falls or crashes and making volatility increase the VIX will increase in value, quickly. 

A problem with trading these instruments is the cost to carry, but they can be a fantastic instrument to profit from in short time periods.

Look at it this way, the SPY was making all time highs, and in my opinion slowing down, I looked at the VIX and noted that it was trading below 12.5. This is an incredibly low value, quickly scanning historical charts I noted that from this low value, it did not take long for the VIX to rally, most of the time within 4 month period. So in light of this I bought a call, with the anticipation that the market was at all time highs and that the VIX was at lows and with the expectation that the market would make any sort of correction which would allow the VIX to increase in value. Sure enough the SPY only pulled back 4%, but on my VIX call trade I made about 90% of my investment in 2 weeks. Why? Well in that small pullback that the SPY made, the VIX rallied 90% going from roughly and below 12.5 to a high and close of above 23.

The SVXY trade would have been to wait for the VIX to rally, which means that the SVXY would fall in value. Because of the positive drift in contango and expectation that it will over time move higher this trade creates those potential opportunities. What I mean by this, is that there are opportunities to trade both sides of the volatility with a long basis on both but trading opposite sides of the volatility move. That same trade movement the SVXY moved from a high of about 77.50 to a low of about 57.50 to roughly 68 where it is now. That is roughly a 26% fall in the underlying followed by a rally of over 20%. This is a substantial price movement and swing. When volatility spikes, a trader could easily, buy calls or sell puts or what ever instrument that they desire and that fits their investment strategy and Return on Capital and or gives the trader the biggest bang for their buck, in light of their risk profiling for the underlying and strategy.

A word of caution, picking tops and bottoms and trading tops and bottoms is a sure way to give your money back to the market. Reversion to the mean is an added incentive to help determine the potential move of a underlying, but bear in mind that reversion to the mean is just an mathematical output and there is always a probability that it will continue moving away from the mean. I have this to offer and that is trade small, and have multiple reasons why the stock is favored to move in the direction of your positions. If the underlying moves further from the mean and all outputs of data are still showing that  with your position their is a greater/higher probability of success, at times like these it may be a fantastic opportunity to continue and reduce your cost basis so your break even moves further from the mean or target profit price. Which in turn creates greater profits when the underlying moves back to the mean or target price.

From the studies and research i have completed, Philip Fisher says it best with his quote; “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves”.

All prices quoted are approx due to there is no point being accurate as every person reading or trading would be trading at different times and different prices. This way it is general but specific enough to get the point across.

The Results you get are based on the quality of Questions you ask Yourself

Something a bit different today thoughts from the holiday period;

When I run my life and my various business interests I have a saying that I use throughout whatever it is I am working on; “The results you get are based on the quality of questions you ask yourself”. To elaborate further and add to that, a “Reader is Leader”. If a person does not spend time reading, learning and growing, and it all starts with reading, then a person is stagnant and not growing. If a person does not read how can they lead? How can you lead yourself, your children, your partner, your business, your employees, or lead in any other life matter, if you have not had a foundation of reading, studying and hence learning so you can become a positive contributor and lead with a well-read understanding of matters on hand.

If you are a reader the questions you ask yourself will improve every day to a higher quality, because of your better understand of matters on hand, and if you’re asking yourself better questions, then when a problem, or any item that takes considerable thought comes across your path you have the knowledge to ask people the quality questions to help provide insightful answers. If you cannot ask quality questions, how can you expect to get quality answers? If you cannot ask yourself quality questions how can you expect to hold an intellectual conversation and ask other people quality problem solving questions, or go on a significant fact finding mission. It holds no water.

So in short and to recap;

“The results you get are based on the quality of questions you ask yourself”.

Become a reader as a well-read person is one who can positively contribute to matters of significant in whatever field they choose

If you cannot ask yourself quality questions and hence cannot be in a position to ask other people quality questions, how do you think that will impact the results you get from your life?

Be well read and versed on aspects that impact your life and put in a meaningful contribution.

All reading falls apart without follow through and action, you can be the smartest guy in the world but if you lock yourself in your room what’s the point?

Look after your mind and body spend your spare time reading, learning and growing and take action today, for tomorrow never comes.