Monday, January 7, 2008
Investing WIthout Training Wheels
I hope you had a good holiday break! I spent a lot of time with my 6-year old son while he was out of school. My wife and I had talked about teaching him to ride his bike without his training wheels over his winter vacation. I understand the fear of crashing can be overwhelming when learning to ride a bike but I was not prepared for what my son had to say when I talked with him about taking off his training wheels. He said "Daddy, I like my training wheels!" and then he said "I don't want to learn how to ride without them and I don't want to crash!" Something about his tone and sincerity got me thinking not only about his training wheels but about how we as investors can get comfortable with our own version of the training wheels, namely guaranteed returns (i.e. CD's and money market accounts). I like CD's too but when they are paying 4.5% and real inflation is north of that it is time to venture into other areas for real return on our investment dollars.Training wheels are great for teaching the basics, how to move forward, how to stop and how to steer. Just like my son enjoys riding his bike with the training wheels we investors can get a little too comfortable with super "safe" investments. My son does not yet understand that his mobility will greatly increase allowing him to change direction more quickly and take corners faster. Of course his fear of falling is natural and real (it is great to know that his sense of self preservation is intact). I am sure he will skin his knees a few times and it will hurt, but he will learn and as he gains skill he will fall much less often until he does not fall at all. Back to investing without training wheels. Sure you can buy REIT stocks as a form of investing in real estate but that is like watching someone else ride the bike.If you have the courage to learn about real estate investing it can be just as rewarding as the free feeling of riding a bike without training wheels. While the risks are higher in real estate than in CD's, the mobility, maneuver ability and real return on investment can also be greater. The best way to protect yourself with real estate is to not have all of your investment capital in real estate! If you are unsure about how much to invest in real estate, start with 10% of your cash reserves. Since some of my real estate investments are raw land, I hold a significant amount of my reserves in CD's to balance the increased risk of my investment strategy.One of the best ways to mitigate risk in the real estate market is to align yourself with a knowledgeable partner and learn from them. This could be from a commercial real estate broker, a developer looking for partners or just other like minded people with investment objectives similar to your own. You may skin your knees on your first few investments but once you learn how to invest and what types of investments work for you then you will be well on your way to making real returns on your investments.I know the real estate market is looking pretty rough right now. A little fear is healthy (remember we have that sense of self preservation for a reason). Too much fear and you will have to find a way to live with less money than when you started.While I am trying to build a regular base of readers, you can email me with questions or even challenges. Happy New Year. Things will be great in 2008!