Investing Demystified by Lars Kroijer

Author:Lars Kroijer [Kroijer, Lars]
Language: eng
Format: epub
ISBN: 9780273781349
Publisher: Pearson Education Limited
Published: 2013-09-06T00:00:00+00:00

I understand and appreciate the desire to own your house instead of renting, and also understand that we badly want to believe that we have made an astute purchase with what for many people is the largest investment of their lives. But buying a property may mean compromising the portfolio of our total assets, by increasing concentration risk and correlation risk in a leveraged way, and I would strongly suggest that any house owner takes a look at the fraction of total assets that local property constitutes.1 Then question what would happen if your local property market dropped in value by various double-digit percentages. Would it matter? Is this likely to happen at the same time as you lose your job or other savings? Would you risk the scenario of being unable to make payments on a mortgage or forced to refinance the mortgage, thereby risking having to realise the price change and being unable to ride out the stormy market?

A major part of good portfolio management is about not putting all your eggs in one basket and subjecting yourself to the risk of bad things happening all at once in an unpredictable fashion. For many who were hurt in the recent property bubble, this was what happened. But I do understand why individual investors put great intangible value to owning their own house on top of the large monetary value many have realised over the past decades. My parents have lived in the same house for about 40 years. Their house is not an integral part of their portfolio or an investment – it is a home. If that is somehow sub-optimal from a portfolio management perspective, so be it.

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