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Fear factor investing

Date: Aug 10th, 2018

Fear is a factor in many of our investment decisions.

Now, that’s not always a bad thing because fear can be an effective motivator that overcomes another great emotional roadblock for investors – procrastination.

Fear can come in many shapes and flavours for investors. There is the fear of not having enough saved for retirement that can provide the positive impetus to put together a long-term savings plan, that means forsaking some short-term spending in the interests of providing a more comfortable lifestyle once the regular salary stops arriving in the bank account.

Then there is the fear of missing out on a great investment opportunity. It’s no secret that Australian’s have long had a well-documented love affair with property, yet fear is still a factor. What is interesting is how the nature of this, in relation to residential property, has shifted significantly in recent months.

If we rewind six to 12 months, the biggest fear investors talked about was the fear of missing out, or rather being locked out, of the property market. A particular concern for younger investors looking to get into the property market was simply affordability.

ASIC last month released a report into the quality of advice given to self-managed super funds (SMSFs). While it was not the main focus of the report, a strong theme that came through from investors who had recently set up their SMSF was that a key motivator was to use the SMSF as a way of accessing their super savings to buy into the property market.

The pitfalls and risks in setting up an SMSF to buy a single investment property is a separate topic for another day. However reading through the case studies in the ASIC report provides a clear narrative of a cohort of investors who are frightened of being locked out of the property market by seemingly ever increasing prices, and are being motivated to use vehicles like an SMSF to get into the game.

The ASIC market research – a combination of qualitative interviews and online surveys – was done mid-2017. If we fast forward to July 2018 a scan of property pages in the mainstream media in Sydney and Melbourne tells a quite different story.

For a start, auction clearance rates are well down on a year ago due to a number of factors including banks tightening lending requirements for investors. In the last quarter of 2017 the auction clearance rate was around 65 per cent. Last week it was in the low 50s – one of the lowest rates for the past decade according to Fairfax Media.

In a relatively short space of time the fear factor has shifted dramatically. From the fear of missing out, potential buyers are now regularly quoted as fearing that they will pay too much and are keeping their hands firmly down, which means auction rates slump further … and so the cycle goes.

For those people who believe that property never goes down in value, now is an interesting time with major capital cities all reporting declines in value. All markets – property included – move in cycles and investor sentiment plays its role in driving that.

Timing markets of any type in the short run is extremely challenging. That’s why one of the best tonics for market-driven fear is having the discipline to do a long-term financial plan that sets out your personal life stage goals, diversifies your investment portfolio across a range of asset classes to offset risk, and gives you the luxury of knowing that when one asset class is pushing your fear button, the others are helping keep you on track and sleep well at night.

Please contact us on |PHONE| we can assist you plan your financial goals.

 Source : Vanguard July 2018 

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

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