Do you remember why you bought your house?
You may have gotten married, were recently widowed, (or even went through a divorce). Maybe you were starting a family or maybe you were downsizing. Most likely the reason was the same for all….
It was probably because you needed a place to live, right?
When it comes to our home, we don't usually buy it to speculate on the price of real estate do we? Sure, we hope that our home goes up in value over time but that isn't always the case.
If you look at the photo at the top of this page, you will see a chart depicting the price of a home not far from our office that was valued at about $1,000,000± in the summer of 2014.
Let's just say you bought this house then, were feeling pretty good about things. The economy seemed to be doing well and your job seemed secure.
Then, the real estate market started to go down and a few months later, your home value plummeted (a term the media tends to like when talking about the stock market) to about $825,000.
What would you do? (assuming you knew it went down in value) Would you sell your home? Maybe rent for a while until things started going back up again and then bought another house only after the real estate market went back up?
Probably not. Yet, this is exactly what many people do when it comes to their long term investments.
If you look at this chart, for this particular house, the trend is going up. In fact, it looks like roughly at the beginning of 2020, the value of this house was about $1,250,000 (I'm estimating here as the graph isn't exact but we see the value has nonetheless increased. Bear in mind, it could have just as easily gone down).
What happens if you bought in the beginning of 2020? Before you knew it, the Coronavirus is in full swing and the economy shifts. There are unknowns; unemployment rises dramatically, and what happens to the value of your house?
That's right. It goes down. Do you sell? No. Why? Because you still need a place to live.
Now, you might be thinking, "I see what he is trying to do here. He's trying to make some correlation between real estate and stocks. But, real estate is different isn't it?"
Yes and no. The real estate market, much like stocks, does indeed fluctuate in price. It goes up and it goes down. Its value is predicated on many factors such as interest rates, supply and demand, and the strength of the economy. One key thing to remember though is, we generally don't buy our house as an investment. Many might have the intention of selling it in retirement to help provide extra money but generally speaking, it is because we need a place to live.
But why is it we don't get all panicked about the fluctuating value of our homes like we do with stocks?
The key difference is the media is not telling you all day long what the value of your house is at any given moment.
Just as you need a place to live, you need your investments to work for you over long periods of times to help provide income throughout your retirement.
As we witnessed just this week, we saw increased volatility in the stock market. Why did we witness that? Because the media feels it's important to let us know! (Not to mention the millions spent on advertising from financial institutions). Did they report the value of your house this week? If they had, what would you have done with that information?
Here's the thing. We should be selling our home when we are making a major change in our lives. Moving to another area, downsizing or upsizing. Not because the value goes down or some news story.
Think of your investments in the same light. When we retire and need income we should take money out of our accounts for that reason. Not because of a news story or some other unrelated reason.
Bear in mind, ALL investments carry some type of risk. Whether investing in stocks, bonds, gold, bitcoin, or even real estate. One can lose money. (If you want to read a wild story about how volatile an "investment" can be, check out the story of tulipmania where one bulb during the 1600's could be worth six times the average person's annual salary. Click HERE to learn more)
As holistic financial planners, we look at the big picture and don't make financial decisions in a vacuum. We have done this long enough to know that if we focus on just one piece of the puzzle, it could lead to disaster. Before making any major financial decisions, it is always best to speak with a qualified professional.
Any questions, please don't hesitate to reach out. We are here to help.
In good health.
All the best.
Rick Fingerman, CFP®
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.