To say that the worldwide economy is going through a challenging period is an understatement to say the least. Governments around the world have built up massive debt piles in light of the 2008 worldwide downturn, the global banking structure is still in need of additional finance and many property markets seem out of the affordability range of local investors. It is therefore no surprise to learn that some property investors are sitting on the sidelines awaiting further direction in the short to medium term.
However, should the long-term nature of property investment be superseded by the array of short-term issues challenging different parts of the world?
Value is value
While the economic environment will change from time to time, if you stick with the old value formulas you can begin to look a little more long-term. Compare and contrast rental income with interest rates and inflation, monitor demand for property and keep a keen eye on the so-called affordability factor. The affordability factor is perhaps a sticking point at the moment because many markets have been pushed to levels which are stretching local investors.
If you find value in a particular property market then you need to consider the chances of a further downturn in the short to medium term against missing a good value investment in the longer term. There is no hard and fast rule as to when you should invest where markets are volatile but the long-term picture looks promising. Some people tend to go with staged investments which ensure they have some exposure if markets go up or down.
Pound cost averaging
One description for staged investments is “pound cost averaging” which basically means staggering your investment over a period of time. The idea being that your initial investment will give you exposure and if the markets fall further you can effectively buy more for your pound in the future. Some people may spot a potential issue here, if you only part invest and the market moves higher you have lost out?
Well, if the markets do move higher it is likely that the economic situation has changed and if anything you should feel more comfortable increasing your exposure on the way up. So, if you see long-term value on the way down, keep investing with a long-term view in mind but if the markets do turn and you are only partially invested, you have a toe in the water and can increase this on the way up. Staggered investing gives you the best of both worlds.
Catching a falling knife
The pound cost averaging strategy is a way in which to avoid “catching a falling knife” which is nigh on impossible. Many have tried to time their total investments to perfection only for markets to fall further which is akin to the knife falling through their hands. It is dangerous to predict when a falling market will turn and, while you may be lucky, smart investors tend to hedge their risks by staggering their investments.