Diversification: A Fine Balance
The Financialist • Issue 96 • January 2008
BY VERA VLAOVICH BA CFP CDS
Buying a home has continued to be part of an overall financial plan for most people. With the increased value of Metro Vancouver real estate over the last 10 or so years, the percentage of a family’s net worth likely includes a higher portion in residential real estate than in the past. Your home may have become your most valuable physical asset. Being a fixed financial asset, it requires ongoing maintenance to keep it in good shape. Annual property taxes, utilities, house insurance and regular home maintenance costs must be considered.
The latest real estate boom in Western Canada has made many people believe that their home has been their single best investment. Investing in the stock market is considered much more volatile than real estate investing. But, even accounting for capital gains on stock market investments, the long-term returns have been much higher. To illustrate this, I would like to share two personal stories with you.
In August 1955, when I was six months old, my parents purchased our family home on Vancouver’s Westside for $9,500. Both my parents have since passed and I sold the home in June 1999 for $413,500. In October 2006, the home was sold again at the assessed value of $662,500. In 51 years, the home grew to 69 times its original value (+6,873%).
Back in the late 1990s I did some comparisons of the growth in value of my family home versus that of the Templeton Growth Fund. Had you invested $10,000 into the Templeton Growth Fund at its inception (November 29, 1954), you would now have $7,263,907 (March 31, 2007). In 52 years, the Templeton Growth Fund grew to 726 times (+72,539%) its starting value. Over this 52 year period, the average annual growth rate of my old family home was 8.5%, while the Templeton Growth Fund has increased at an average annual rate of 13.4%.
As with all investments, diversification is key. The old saying “Don’t put all your eggs in one basket” can certainly apply to owning a principal residence. Most of us would not put all our money into a single stock, but many have done so with a principal residence. In the late 70s when I finished university, I wanted to buy my first home. However, at that time, mortgages of 17% and higher were common. I was greatly discouraged by the possibility that I might never be able to buy Vancouver real estate. Then, in 1981 and 1982, Vancouver’s real estate prices dropped over 30%. Knowing a bargain when I saw one, I purchased my first home for $160,000 in 1983. So, as much as it seems presently inconceivable that our homes could drop over 30% in value, history has proven otherwise.
Dr. Moshe A. Milevsky, Ph.D., author and keynote speaker, made the following observations in a recent article:
“I like to think of my house … as a big and expensive fridge that I plan to use for the next 10-20 years. It has to be large enough to accommodate my family’s growing needs, efficient enough to avoid large electricity bills and nice enough to hang up my children’s art work. I honestly never thought of it as a good financial investment – especially not in today’s market – but more of a financial asset, since I would have a tough time sleeping at night with the eggs in one fridge.”
Rising house values are making homeowners feel wealthier, and for some, following a disciplined approach to liquid savings and investments has become more difficult. As with other aspects of life, a fine balance brings optimal long term results.