I’ve been doing a bit of reading recently on strategies used to obtain financial freedom. Of particular interest is the stuff I’ve read on asset allocation and modern portfolio theory. So the theory goes that with any asset it will have a profile of reward relating to risk. The higher the risk, the higher the reward. Modern portfolio theory explains that with appropriately weighted diversification of assets in your portfolio you can achieve the same level of reward with lower levels of risk. This is due to varying levels of risk correlation between the individual assets.
So, many believe that investing in funds that track the index along with a good portion invested in bonds is the most efficient way to financial freedom.
The problem I see with this theory is that the major assumption is that one cannot purchase an asset with an asymmetric risk/reward profile.
In my opinion Australian property can be purchased which has this asymmetric profile. To me, this means that investing in property is superior than the above strategy.
Is this a rational conclusion or am I suffering from confirmation bias?
Simon Plummer | SP
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An intelligent and sophisticated question. I don’t know enough to answer it.
One thing I know about though is LVR.
This too has everything to do with risk. I’ve seen plenty of info from people saying this and that gives better returns. For me, I consider it from someone who has little to invest and must burrow. The ability to borrow so much for property for me is what interests me.
Diversifying makes lots of sense, but I’d normally start with property.
So, many believe that investing in funds that track the index along with a good portion invested in bonds is the most efficient way to financial freedom.
I doubt that. You can check it. Get the past 20 years performance of an index (say ASX 200 or 500 or whatever index you wish) and a government bond and draw an excel sheet. Then ask yourself if that is financial freedom.
In my opinion Australian property can be purchased which has this asymmetric profile. To me, this means that investing in property is superior than the above strategy.
Don’t confuse yourself. Stick with property. If you don’t have experience in investing and are not financial savvy stay away from shares. Even experienced investors get it wrong most of the time.
Property is a direct investment. You have more control over it compared to shares. You can renovate, rent out rooms individually, move into it, etc. Plus I’ve never heard of property prices go down to 0..
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AndrewsuperAndrew | Property Analyser and Finder Tool
https://property-analyser.com.auEveryone’s got to start somewhere right? I think a bit of diversification in investments is good. Hell I bought some shares this morning, how many others on here just invest in property?
Thanks for your comment Andrew.
This is generally the strategy used by billionaires like Carl Icahn, Warren Buffet, Jack Bogle, David Swensen etc. Albeit more sophisticated models but in essence a huge amount of diversification to optimise this risk/reward profile. This is also quite a common methodology in the US for individuals seeking Financial Freedom.
I am not unfamiliar with the financial markets so my question isn’t a matter of me confusing myself. I am interested to hear from people who have a reasonable understanding of these theories and still choose to invest in Australian Property. Or if they choose otherwise.
Close to 100% of my investments are in property purely because I see higher returns for less risk compared with shares. If you can achieve lower risk and higher reward than a diversified share portfolio then this is going to be the more efficient option.
Simon Plummer | SP
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The thing is, here people are more interested in property so it may not be the widest audience, however I’m sure there are some who have shares too. It makes sense to diversify. The big bonus to shares is the cashflow element. In good times, people often borrow for shares against their house equity. Personally, I’d be very careful with that idea. For me I’d treat shares more like savings that are a bit riskier. If I had a spare $10,000 that I’d need again in a year maybe I’d invest it there. It depends on strategy but that’s how I’d use it, but if I had a loan, maybe I’d offset it for another reason.
For me, property is the foundation, shares are the play. I have a friend who works the other way though and he has done very well.
I stopped worrying about property vs shares a long time ago.
I am lousy at shares (equals gambling) but have been doing property for a while so I know I can outperform averages in the short term with active strategies (negotiation, cycle, renovation, development) in the long term properties will revert to the mean anyway but the returns are fine in my view when combined with the essential ingredient of leverage.
The risk reward equation for property is about SAFELY using as much LEVERAGE as you can to MAGNIFY your base returns without risking bankruptcy in event of a short term but painful problem (ie unemployment, interest rate rise, extended vacancy etc).
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This reply was modified 9 years, 3 months ago by
BuyersAgent. -
This reply was modified 9 years, 3 months ago by BuyersAgent.
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A few years ago I heard someone make a good point that to beat the All Ords you need to be better than the fund managers. But beating the avg Aussie home owner’s capital growth should be pretty easy since they don’t think like investors. Dunno if that’s “asymmetric risk/reward profile” though.
I don’t understand share stuff, so not an option for me anyway :)
And there’s no guarantee your shares won’t be worthless in 20 years time (thanks Kodak). But property in 20 years time… gees it’d have to be under water or something.
The All Ords is just an index and to beat it you could buy all shares bar a couple that have poor outlooks. Out performing the market can be done in share investing if you diversify less. This however increases risk or so the theory goes.
According to the theory, buying a $300k property is going to be on the high end of the risk/reward scale. You have basically all your cash plus say 5 times that in debt resting on one asset. But to me this is less risky than getting an 80% loan and buying one company’s shares.
I guess I think this as property prices tend to slowly grow (mostly) where shares prices are a little more erratic.
Volatility in a share price is generally considered risk which is why I kind of think that property provides an asymmetric risk/reward profile.
Simon Plummer | SP
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So by “asymetric” do you mean reward can be high in some cases but the risk isn’t that high? Or vice-versa? So we want to increase the reward but with no change to risk, or even decrease risk in the one action. And that would make it asymetric. Stuff like choosing good tenants improves yield AND reduces risk of damage. We need a bigger example. Can’t think. But I get your pt and I think you’re right. Perhaps this is where investors should be focusing – those strategies of property investing that are asymetric.
Spot on :)
Simon Plummer | SP
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