I noticed towards the end of last year that the same question was being asked over and over on my livestream Q&A sessions: with all the talk in the media of recession and slowdown in the economy etc, a lot of people began to wonder whether should they sell their properties, or whether they should withdraw any offers they might have recently made but weren’t yet legally committed to.
In my last blog I looked at some of the factors you need to consider before making any decisions to change your strategy, and here we’re going to take a look at some of the other things you need to think about: your mindset around your lifestyle and how you react in the face of a potential problem.
Like many people with a mortgage, you’ve most likely seen your interest payments increase over recent months. So how exposed does that leave you – is that extra interest eating into your available cashflow? If you been relying on that income to fund your lifestyle, how much of that is discretionary and could reined in?
If you’re enjoying a comfortable lifestyle, it might be time to pump the brakes and start putting as much as you can into paying down your mortgage or to build a safety net for yourself in the event that rates continue to go higher, rather than spending your ‘extra’ cash on luxuries.
Now, a lot of people might not like it when the market or their income falls off, and they find that they have to give up some of the treats they’ve become used to. But the reality is that you just have to grin and bear it: don’t let it dent your ego. A lot of people tie their worth into status symbols and build their identity around them. I saw this a lot in 2005 and 2006: people were driving flashy, expensive cars, like Bentleys or similar. When the market crashed, they had to give them all up and many people couldn’t handle it – a lot of them actually took their own lives because of this apparent fall from grace.
So you have to be mentally strong and adopt an ‘easy come, easy go’ attitude. I had a Bentley and it was great, but now it’s gone. That’s life.
Look at how much of a margin you have. If you’ve got a good yield, maybe 12,15 or 17%, then I think you’re probably going to be in good shape and will weather the storm just fine. But if you’ve pushed the boat out and only just managed to scrape enough together to make ends meet, then this is could possibly be a difficult time for you. I can see people shifting into a negative cash flow quite quickly, so it’s a worrying time for a lot of people.
It’s vital to consider how you’re going to weather and manage a cash shortfall and burying your head in the sand is not a strategy. I’ve done that when I didn’t like the thought of selling a property at a loss: it was so painful to accept that that I decided that I just didn’t want to think about it and sure enough, a couple of years later, I lost about 4 times more on that property than if I’d just faced up to things at the start. If you are marginal now and have to sell at a loss, the likelihood is that the situation won’t going to get any better. The price that you thought the property was worth six months ago, that’s gone, which is something you’re just going to have to accept.
It’s a very hard decision to make – most people have an aversion to making a loss, and I can totally get it. I hate taking a loss! But I can guarantee that when you’re heading into a difficult market like this, it’s better to take a loss early than to hold out and then find that you’re losing more later. If I told you that you’re you’re going to lose an awful lot less today than you will in twelve months’ time, what would you do? You’d bite the bullet and just accept it.
The last thing to consider when you’re thinking about whether to keep or sell your assets is your investment strategy. Has anything changed here? Investment managers in big institutions will always have a look at a person’s investment horizon, that is – their age. A young person is always going to be put into riskier assets – the ones that grow quickly, like the Nasdaq or tech companies that grow really fast – because they have the time to weather a fall in value.
However, the investment managers are going to be a lot more careful with someone approaching retirement age. They’ll move a portfolio out of those risky assets and a much greater portion of it will be moved to cash or into bonds, so that they less likely to suffer a sudden fall because of a market crash.
If you’re investing in property etc to supplement your retirement, then you may prefer to release an asset now so you have the cash under your control, whereas a young person may decide to wait another 5 – 10 years to collect the income.
As long as you haven’t left yourself really exposed with a heavy amount of borrowing, it’s all about managing your risk and your mindset. Remember, this is a cyclical market and it’s always going to fluctuate. Nothing has changed fundamentally, but the sudden shift in sentiment can be unnerving and we often look to cues from the people around us to gauge our safety. If you see a lot of people screaming and shouting, of course you’re going to be twitchy!
That’s effectively what’s happening at the moment. But if you know that your strategy is sound and that you’re in a good situation, then think very carefully before making any impulsive decisions.