Everyone wants to earn the highest returns on their investments, but what if we told you that the highest return isn't the number one factor for success?
You might ask yourself then, what is the greatest factor that leads to a successful investment?
The one factor above all else that has led to the most success is time.
Time in the market almost always beats timing the market.
Property is an investment that has grown at an average rate of 6.3% over the past 30-odd years.
Throughout those years, there have been periods of high growth, price reductions, and everything in between. These periods are often referred to as bull and bear markets.
In a bull market, returns are high and investors expect their money to perform well, whereas a bear market is characterized by investor pessimism and low returns.
Makes sense to only invest in bull markets right? This is a common belief for a lot of investors, many of whom are subsequently stung when the market cools and their risky investments don't pay off.
Therefore, "the key to good investing is not to earn the highest returns; it is to earn pretty good returns consistently." What does this actually mean though?
If you are investing for the long term to build wealth compound interest is the backbone of property investment meaning that as long as you keep your investment in the market for a long time, you will likely get a good return in the end.
The first rule of compounding is to never interupt it unnecessarily - Charlie Munger
Selling your investments disrupts the compounding of your gains which affects the overall wealth that you are working to build. For property investors, your incentive is to not sell any of your investments at all and leverage off the equity to continue investing.
Time is also the great fixer of risk.
Although time doesn't reduce risk, it allows a path for your investments to sort themselves out. For instance, if you purchased a property at the peak of the market, you risk paying large amounts of interest on the loan, but after a number of years, you can simply refinance the mortgage to another lender, extend your loan term and reduce your payments.
Once again, time is on your side.
Wealth is not visible but it provides options for yourself in the future. Financial freedom is one of the greatest goals for most people in life and accumulating wealth through appreciating assets is one of the most efficient ways to do it.
Being "rich" and having a high income does not guarantee financial security in the future because, without assets that generate wealth, your income is disposable and can be spent at will. This is short-term gratification without the guarantee of long-term financial security.