June 19th, 2013 12:14 PM by Eileen Denhard
A lot of investors who love to buy at the bottom and sell at the top are kicking themselves these days—for missing the market peak in gold and the nadir in housing.
They shouldn’t. Before I explain why, let’s look at a couple of charts.
The key moment, the one when gold was peaking and house prices couldn’t go down any further, may have come a year or more ago. It seemingly arrived somewhere between September 2011, when gold touched its all-time high of $1,875 per ounce and February 2012, when the S&P/Case-Shiller Home Price Indices set their lowest level since the housing bubble burst in 2007.
The result is that quite a number of investors—even some of my high-net-worth clients—are now hanging on to their gold and/or refusing to buy a house on the hope that they’ll get another chance to sell at a peak or buy on a dip.
Gold investors cling, for example, to hopeful scraps of news, like the announcement last month that Cyprus may not have to dump its $534 million in gold reserves to meet the terms of its bailout. Or they take comfort in reassuring words from goldbugs like John Hathaway of the Tocqueville Gold fund, whotold the Associated Presslast month that the “thesis for maintaining exposure to gold and gold mining stocks hasn’t changed” and that “with the price decline, the thesis has improved.”
Meanwhile, renters who’ve spent the last three or four years patting themselves on the back for not owning a home now look glumly at prices zooming up. The housing rebound is lively in places like Las Vegas (up 15% between January 2012 and 2013), Phoenix (up 23%) and San Francisco (up 18%). Some dismiss the upticks as a new bubble. And of course, there are plenty of market commentators happy to flatter people who share that point of view.
This kind of thinking is pretty pointless. Getting caught up in regrets over what you could have bought or sold a year ago is roughly the same as buying a stock—or, for that matter, a bond or a Bitcoin—because it’s hot.
Forget the fever charts. Instead, focus on what you wanted an investment to achieve when you bought it. Ask yourself: What was my original target rate of return and original risk tolerance?
Say your original target rate of return was 60 percent and your risk tolerance was high. Well, if that investment is down 20 or 30 percent but the picture still looks fundamentally good, you probably shouldn’t sell.
On the other hand, if you originally targeted an IRR of 6 percent and you’re down 12 percent, that’s more worrisome. The investment clearly didn’t do what it was supposed to. Get out, and find a different investment that is more likely to meet the parameters you’ve established.
Meanwhile, if you bought gold because you thought it would be a safe haven and it hasn’t turned out to be, sell it. As sometimes happens, the investment failed. Find a safer haven.
As for housing, if you want shelter and discover that the cost of owning for five years is less expensive than renting would be, then by all means, buy a home. Make sure it is one you can afford, and don’t over-leverage. Currently, the cost of owning is lower than the cost of renting in most U.S. cities.
It’s pretty clear why. The tightening mortgage-underwriting standards means quite a few people who could afford the monthly payments can’t come up with the 20 percent down they need to buy a home. That’s keeping demand for rental homes high, so by-and-large, rental prices are going higher.
If your own/rent ratio is more or less breakeven—make sure you count everything, including the maintenance costs that come with owning but not with renting—it’s not crazy to buy a house. Given the record low interest rates, upward direction of rents and the still relatively modest home values out there, it’s probably a good time to buy—even if that means buying from some flipper who was smarter than you and purchased it for way less a year ago.