Loss Aversion
Annie Duke’s research highlights a common issue among investors: loss aversion. Investors often struggle to sell underperforming assets because the pain of incurring a loss outweighs the joy of making an equivalent gain. This bias leads them to overvalue assets they already own, making it difficult to let go of investments they wouldn’t consider buying in the open market.
The solution? Many investors opt to hold and hope for recovery, but selling before further decline is often the wiser choice. If an investment isn’t yielding returns, it’s better to sell and reinvest elsewhere. Diversification and timely decision-making are crucial to managing investment risks effectively.
The First 100 Days
If Labour wins the general election, their first 100 days in office will focus on changing planning policies. They aim to reform the national planning policy framework, enforce mandatory housing targets, and simplify infrastructure development, such as train lines, hospitals, and schools. These initiatives require funding, likely leading to tax changes. While tax hikes are contentious, they can enhance public services, a trade-off worth considering.
Labour’s potential policy could take inspiration from Auckland, New Zealand. Auckland’s planning changes allowed denser city development, resulting in 44,000 new homes in seven years and significantly lower rent increases. This approach could support affordable housing in the UK.
In an ideal scenario, these changes would reintroduce mortgage interest rate relief for landlords, balancing affordable housing with economic stability. While not perfect, promoting affordable homes while ensuring profitability is key to a healthy economy.
20% ROI
Recent articles in the property press claim that achieving a 20% return on investment (ROI) is easy. Such opportunities do exist but require careful consideration. For instance, purchasing a property for £100,000 with a 70% loan-to-value (LTV) ratio involves investing £30,000 plus 6% purchasing costs, totalling £31,800. To achieve a 20% ROI, you’d need a net annual profit of £6,360 (£530 per month) at a 9% interest rate, which translates to £6,300 in annual interest payments.
This scenario requires a rent of at least £12,660 per annum on full repairing and insuring terms, equating to a 12.66% gross yield. While feasible, it involves significant risks, such as tenant turnover and legal complications. For instance, a property auctioned by Savills illustrates this potential, but without due diligence, the risks can outweigh the benefits.
Achieving a 20% ROI is possible but comes with high risks. Thorough research and risk assessment are essential to avoid pitfalls.
Summary
In summary, understanding loss aversion helps investors make better decisions, Labour’s potential planning reforms could boost affordable housing, and while 20% ROI opportunities exist, they require careful evaluation. Balancing risk and reward is key in all investment decisions.
