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Don't Get Carried Away by Short-Term Gains
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KiLrOy
Master |
08-Nov-2007 01:25
Yells: "I buy only what I can see." |
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Sometime back I read this article by Larry Haverkamp (Doc Money) who is a 'Monday' columnist with the New Paper and I thought it's appropriate to share since he usually speaks about things closer to home. He has a very informative website which I typically will try to look at it once a week http://www.askdrmoney.com/ or when I need to know where I can get the 'best deal'. I think you will like it too since its like a ONE STOP SHOP for almost everything well not everything... *chuckle* By Larry Haverkamp (Doc Money) July 17, 2007 HURRAY. Boom times are back and everyone is getting rich. Stock and property markets are at or near all-time highs. Economic extremes - both good and bad - bring out the market gurus with their bold predictions of boom or doom. Here are some of them. PROPHETS OF DOOM You may know Robert Kiyosaki. He is the Hawaiian-born author of the best-selling book Rich Dad, Poor Dad. His latest predictions caught many by surprise. He claims things have gone downhill since President Richard Nixon took the US off the gold standard in 1971. That has made an economic crash more likely. He predicts it will hit us soon. Hong Kong economist Marc Faber is known as Dr Doom for his not-so-rosy forecasts. His latest is 'the US stock market, like all other asset markets, is in cuckoo land... The Dow Jones and the S&P 500 are in an incredible bubble phase'. These and other colourful experts all have one thing in common: None publicly tracks his advice in a model portfolio so that we can see if it produces gains or losses. PROPHETS OF BOOM In good times - like now - there are even more prophets of boom. They jump on the bandwagon and tell us how easy it is to make money. On 4 Jul, The Business Times ran an article by Mr Clemen Chiang, There's Upside Yet In S'pore Property. It walks readers through a real-life example of a strategy he calls 'buy low, sell high, make money'. The story starts with a cash outlay of $205,600 to buy a property costing $1.6million. Then, 'one year later, the owner sells the property for $2.7m and reaps a profit of $970,715'. Whoa. Hold it right there. The happy outcome depends entirely on the property's price appreciating from $1.6m to $2.7m in one year. If it happens, your cash outlay of only $205,000 will earn a profit of $970,715. It is a whopping 475 per cent return on your cash investment. Easy-money stories like these blow the housing bubble even bigger. The risk is the bubble may burst and - heaven forbid - property prices may actually fall some day. INVEST, DON'T SPECULATE In the middle ground are experts who advise caution: 'Keep cool, remain on the sidelines and wait for markets to dip'. That's also bad advice. Why? Because there is no way to know when a dip will occur. What if the boom continues for another 10 years? You would have missed most of the market's bull run. The solution, I think, is to forget market timing. Forget short-run speculation. Remember to invest for the long-run. Short run: Over the next week, month or year anything can happen. It means the chances for short-term gains and losses are about equal. Without special or insider information, you will do no better than to break even. When you consider costs, the odds tilt against you. In BT's property story, costs total $129,000 which is two-thirds of the $205,000 cash investment. High costs like that make the investment risky and short-term losses more likely. Long run: Invest for the long-run and your chances of winning increase substantially. First, you can spread costs over many years so the cost per year is lower. Second, equity investments - like stocks and property - have a history of returning around 12 per cent per year, including the dividends and rents. Conclusion: Go ahead and plunk down your money to buy a home now, but only as a long-term investment. The longer you hold it, the more certain you can be of realising the 12per cent average annual return. It isn't just property. This advice also holds for shares. Data from the US since 1926 shows there has never been a 17-year period when stocks have suffered a loss. Here in Singapore, we have never had a 10-year period when the Straits Times Index has closed lower at the end of the 10 years than at the beginning. In the short-run, the picture is quite different. Looking at the 26 one-year periods since 1980, the STI closed lower in 13 of them. It is a 50-50 outcome and shows the unpredictable nature of short-term price movements. |
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