The stock market gives more good advice to home buyers and sellers.
A while back I posted good lessons for any home buyer or seller, picked up from an investor questionnaire sent me by my stock brokerage. It has me invested in a multitude of mutual funds, which means I get a multitude of fund newsletters and, for better or worse, I read every one. Lately I've been seeing lots of articles on how to keep the faith in turbulent markets, understandable given the stunning ups and downs of the stock market—not that Wall Street has a monopoly on ups and downs—and the article "Staying the Course", in the Fall/Winter 2010 issue of American Funds Investor, may be the best.
For example, it tackles the question, "Why do investors tend to sell in down markets, even when they know they'll regret it?". According to the article, this self-defeating urge is actually a hang-over from the primal "fight or flight" survival instinct. Something trying to grab your stash? If it's about your size, fight it. If it's bigger than you—and that's an apt description of every market—it's flight time.
While flight is a big temptation for stock market investors—fight is rarely an option, and flight far too easy—I haven't noticed this much among homeowners. A few years ago I did have a client who told me he'd sold his home right after the Iraq invasion, convinced Armageddon was bearing down on him. But homes are far less liquid than stocks, and if illiquidity isn't enough to cool a nervous homeowner's jets, the media's tales of seller woe usually are. Besides, it's easier to close out your position in XYZ Corp. without alerting your loved ones than it is to put the family home on the market.
What I have noticed is that flight is the preferred option of maybe nine of ten home buyers in a down market. The unfortunate downside to this strategy is that a) down markets are buyer's markets, and b) you make your profit when you buy, not when you sell, which means that c) fleeing the market isn't a strategy, it's an (understandable but far from bulletproof) instinctual response. You've neatly ducked the risk of buying a home just before you get laid off, only to get leveled by stampeding buyers when the market roars back. You may gladly accept this trade-off, but without knowing you've made a trade-off.
Here's another pearl: "turn down the volume". "When the market is rising like a rocket or sinking like a stone, the popular press seldom provides analysis that's useful to long-term investors. Instead the headlines tend to play up whatever information or trend has grabbed the momentary attention of traders and pundits". Substitute "news anchors" for "traders" and you've got the real estate coverage du jour.
And another: "find the broader context". Alarmed that home prices have gone down 15 percent in your neighborhood? Well, that's not a once-in-a-lifetime life-or-death event. Prices probably went down by about that much in 2001...and in the early 1990s...and in the early 1980s...and in the early 1970s...and in the late 1960s...you get the idea. The long-time homeowners in your neighborhood have survived a number of dips without serious financial harm. And who among you facing this area's stupendous home prices doesn't wish he or she had bought back in the day?
And still another: "recognize the potential harm of sudden movements". As I've said, it's hard to make sudden movements in the real estate marketplace, at least as a home seller, but I'll throw in this quote just to counteract the stock-market-automatically-returns-10-percent-annually thinking that's a centerpiece of the anti-homebuying argument: "A recent study by financial research firm Dalbar determined that over the 20 years ended December 31, 2009, the average stock investor's return trailed that of the broader market by nearly 5% per year. Put another way, if the stock market gained 10% annually, the average investor's portfolio realized only a 5% gain." The stock market isn't necessarily the little guy's friend, especially when the little guy flinches every time there's a cloud on the horizon, as little guys do.
And finally: "think like a contrarian". "Making purchases during a downturn", says the article, "is often like buying investments at prices below their long-term average...because as markets become less emotionally driven, [assets] return to something closer to their long-term average, and investors who 'bought on the dip' can benefit". Easier said than done, unless you're Warren Buffett, but still sound advice for both the stock market investor and the home buyer.
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