Try to imagine what would happen if there was a market price available for your home at any given moment, which was set by supply and demand. In short, imagine your house was traded in a house exchange. Scary thought, isn’t it?
I can picture myself rushing to the computer every other moment hoping prices went up. Even a small fraction of percent would be significant when real estate is at stake.
This kind of behaviour would obviously not constitute smart investing. We always preach to ignore the noise in the short term and invest for the long term. Why is it so difficult to do when it comes to stocks and easily performed when it comes to real estate?
This is all the more baffling as the huge amounts of money we invest in real estate, or our home, make the money we trade in stocks pale in comparison. Why are we so anxious and stressed when it comes to a couple thousand dollar invested in stocks and so relaxed when it’s hundred of thousands invested in a home? This is an obvious exaggeration but it does holds some truth.
First and foremost, we are not rational beings. Homo-economicus has yet to make an appearance. But this explanation is too easy.
The more probable explanation is that our real estate is usually also our home and we can make good use of it by living in it or any other similar psychological explanation. Theses uses do not depend on its current market value. But what about real estate investments then? Why are these considered less stressing or safer then investing in stocks?
Actually I find there is all the more reason to be worried when it comes to real estate investments as these investments are usually of very significant volume, they are not diversified and they carry significant specific risks (a risk which can be eliminated in stock investments – for more information see here).
I believe the availability of information when it comes to investing in stocks actually throws us off balance. Warren buffet once said only invest in a company you’d like to own even if the market closed for the next 10 years. This is the basics of long term investments. The noise in the short term is enormous. We are constantly presented with prices, trends, analysis and valuations. Our exposure to the stock market is often and frantic. If we could separate the business behind the stock from the price in which it is traded then we would make some progress.
Another argument might be that when it comes to real estate identifying potential is easier then in the stock market. I highly disagree. Real estate requires no less expertise then stock investments and it is riskier.current market value, explanation, home, homo economicus, house, investing in stocks, Investments, moment, real estate investments, stock investments