Advice for a long-term investor: stocks, property, both?
Hi all,
What is the best place to put my money? Am in my 20's, fortunate enough to have a good chunk of cash in the bank as well as a chunk in index trackers. About 20% of my savings are in trackers, which I add to every month automatically.
I do not own a home, but as my employer pays for my rent, I am not 'throwing money away' on this, and therefore am able to save a large proportion of my salary.
My question is, given that I have a very long term time horizon (10 years +) where should I be investing? A lot of different asset prices seem attractive to me now. Do I:
(a) Increase my monthly payments into tracker funds to take advantage of the current prices
(b) Invest in property - the idea being that eventually I will want to own somewhere of my own
(c) Both
Obviously the more money I have tied up in funds the less I have for a deposit, and therefore the bigger my mortgage.
Either way, I'd be careful not to over extend myself, keeping a cash reserve 'just in case'
Additional Information:
**
Hi Ethan,
Thanks for your help! Answers to your two questions, they would not pay me the higher salary; I do have to pay taxes on the free rent. You mention 20% down - is that all I would need? I am assuming banks are rather more conservative these days when lending for mortgages. Also, while central bank rates around the world are coming down, are mortgage rates following suit? I suppose the bigger the deposit, the lower the interest rate?
On the trackers, I am very comfortable with further downside risk. I do also own some gold, and am looking into a diversified commodity fund.
Thanks again,
Moresby
Answers
4085 points
EthanR answered 10 months ago …
Moresby, you are in a terrific place right now, holding cash in an environment where both stocks and real estate are becoming cheaper. Two questions that I have: If you gave up the free rental, would your company compensate you with a higher salary? And do you have to pay taxes on the value of the free rent?
If the answer to those two questions is yes, then I would purchase a home. Interest rates are very low and prices have come way down. You can probably find a decent looking foreclosure that doesn't need too much work and will save you even more money.
Over time, the value of a home should appreciate about 4-5% per year, whereas being in the rental only saves you money. So if the company would pay you the equivilant in salary, I would take the money and buy a home.
However, if the company will not trade more salary for the free rent, then stay in the rental and buy a home now for investment purposes. You will need 20% down and a credit score over 700, plus a debt to income ratio that is not too high. With free rent and lots of cash, I am assuming you will have those criteria met. You do not necessarily have to buy an investment home that you will want to live in later on. If/when the time comes that you wish to buy a home to live in, if you need money, you can simply sell the investment home, or possibly do a cash out refinance on it.
I would also continue contributing to your Index tracker funds right now. However, you may want to wait to add to it, until you feel comfortable that our bear market is over. It depends on your comfortability with the risk of further downside versus the potential for appreciation in the near future.
I think you might add a little bit of gold and other commodities to the mix as well, as we will likely see inflationary times over the next 5-6 years. I think you are very prudent to keep some cash on the side as well. Good luck!
3963 points
MNSL answered 10 months ago …
During next 05 years there will be winners as well as losers in all type of investments.
Those who can take correct investment strategy will benefit most.
I think different investors should take different strategy and approach to the current investment areas.
Those who over committed to real estate will have tough time in the next 05 years globally. Thanks to rental income still they are surviving while some are finding difficult to find tenants to rent now. Higher unemployment rate in the next 03 years will make them more vulnerable in the next 03 years.
Those who awash with cash can take some risk and can invest in stocks and real estate without any fear now.
First home buyers should not rush to buy houses now. They should do thorough research before buying houses. They must learn almost everything. Those who are not sure about their jobs must think twice before investing houses. Unfortunately some genuine home owners will lose their homes due to their risk of losing their permanent jobs in the next 03 years globally.
Flippers and some speculators can not make profits now. They can not dispose their properties now.
I am still observing what top real estate investors are doing now. Their move is very important for investment area.
Some genuine real estate investors have invested for the long run. They will stay in this investment area for the next 50 years due to their approach and strategy to this area. Even now they can provide competitive and low rental fees for those who like to rent their properties. These investors will survive in the next 05 years. Unlike flippers and some speculators this group provide some stability to the any type of market.
Some say this is time to sell. Some say this is time to buy.
Average investors should think about margin of safety now. They should not follow the crowd now. They must buy assets and stocks for the correct price if they want to avoid unnecessary losses in the next 05 years.
There are plenty of profits to make in any market. Those who have money can do wonders now. They can invest in stocks real estate and other assets. Today’s market is better than yesterday. Even some can make short term profit in short term rallies. Some stocks already appreciated more than 70% from November low within four months. Still there are companies which are going to make profit in the quarter ending March, going to remerge as leaders and going to turn around strongly in the next financial year and beyond.
There are plenty of opportunities for long term investors in almost all the areas.
4085 points
EthanR answered 10 months ago …
Moresby, based on the answers you provided, I would stay in the rental for now unless you find a screaming steal of a deal on a home that you like. You know when it comes to one's own home, true it's an investment, but it's also the place you spend a lot of time. So you want a home that meets your needs, not just any old home that was a good price.
However, for investment purposes, find a home that is very simple to maintain. Single story are easier than two story. Look for a newer home in foreclosure-I'm not sure what area you live in, but in many areas there are a ton of homes built 2003-2007 that are now in foreclosure. Yes, you should only need 20% down. If you put more than that down, you will lower your monthly payment, and possibly your interest rate. But if it doesn't lower your interest rate, I would stick with 20%. In real estate, the lower the down payment, the greater will be your return on investment (ROI).
In the last few days, interest rates have come up a little bit because of the stimulus bill, but overall rates are very good right now. On investment property you may have to pay a point or two (each point is equal to 1% of the mortgage amount). If you can make a deal where the seller pays your closing costs, that would be great, but then they don't usually take as much off the price. So it all depends on whether you would rather have the lower monthly payment or less cash out of pocket.
I would suggest that you read some books on landlording if you decide to go the investment property route. A good website would be http://mrlandlord.com Lots of information on that site, some free, some not. Good luck!
265 points
fuzball answered 10 months ago …
I think it is a dumb move for anyone to invest their money in an asset that is declining in value. In this unprecidented time of financial catastrophy saving your money is the smartest move you will make as both stocks, generally, and property are still declining and have a way to go before bottoming. You are in a good position to reap a fortune if you can patiently await that bottoming process to begin. You have a good job, one that pays well and you have your youth. I would lessen any stock market investments and continue to hoard cash. Perhaps commit a small portion to invest in biotech, health care and infrastructure to keep your interest up. When the time comes you will be sitting pretty with plenty of cash on hand and on your way to a great financial future. Patience. Best if luck to you.
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368 points
ads answered 10 months ago …
I tend to agree with Ethan regarding his real estate comments, from the sounds of it you would be best off to not purchase unless you found one hell of a good deal on something you would love to live in. As far as renting, there are a lot of available rentals right now and without knowing much about what you are doing I'd recommend staying away from that (unless that is something you want to learn and become very active in, although I think you will have a tough time right now). As far as other investments, there are a lot of great companies out there that are dirt-cheap due to having been drug down by the general malaise of the market yet that are still strong and are seeing good earnings. If you do look at investing into stocks, then I'd be sure to do your homework and check each one out to make sure that they are very sound and financially strong, as well as that they are a good value (look for low P/E and P/B ratios, but again make sure that they are sound companies also). In that area, I'd be sure to take a very close look at Small Caps, as when the market turns around those are the companies that see the best returns, as they are generally positioned to be able to take advantage and move quickly to grow into the economic upturn. Thus I tend to disagree with fuzball to some degree in that while the stock prices appear to be falling (they have actually been improving slightly, although personally I'd refer to it as trading sideways), when the market turns around it tends to do so very quickly and the bottom is not seen until after it has already passed. And it is those who are in at or near the bottom (and are willing to take that chance) that tend to see the best returns. I'm not saying we are at the bottom yet, but I'm investing what I can spare into the markets right now and while in the short term I may see slight decreases in value, I’d rather be getting into the market now before the spike that will likely hit within the next 3-12 months (as I don’t think it will trade too much lower between now and then) than to wait for it to happen and miss out on the first couple of days of that spike (which tends to be the largest increases when the markets do turn around). But again always be sure to know what you are getting into and get all the details before you buy something.
Read more from ads2775 points
Oldman answered 10 months ago …
I will assume that you are aware of the Insurance costs for protecting your property...fire insurance in SE Australia is probably pretty expensive, now. In addition there're the issues of property and other taxes you might incur with an investment/home purchase. Finally, what happerns if your "housing for the benefit of the employer" disappears due to some downsizing, budgetary crunch.
It once happened to me ... I had to move, and it was a time of increasing rates for mortgages, etc. I would keep as much of my savings in liquifiable forms. All of EthanR's reponses are correct and appropriate ... if the guarantee, by seniority or from contracts ... is that your employment will continue for the foreseeable future.
