Your home isn't your best investment...it's just your longest.
WRITTEN BY: Gideon Drucker, CFP® AIF® ECA
People often think that their home is their “best” investment.
It’s probably not. The reason you think this is because it’s the only investment that you bought, held, and left alone for 30 years!
If you bought a home 30 years ago for $400,000 and today it’s worth $1.2mmm...that sounds amazing. Look at all those gains on what started out as a relatively small investment. The numbers are eye popping at first glance.
In reality, you’ve averaged about a 3.7% annual rate of return. It’s just that you allowed time to compound your money in a way that you don’t afford any of your other investments ie: you didn’t obsess about performance month to month and so you get the benefit of focusing only on these large, round numbers. The small amount at the beginning and the large amount at the end.
That same money ($400,000) invested in the S&P 500 would have earned $2,025,646 over the last 30 years. That’s almost double!!
But what would have earning that growth required?
- That you didn’t get nervous and sell out your portfolio when it lost 20% of it’s value (which would have happened 5-6 times at least.)
- That you didn’t get impatient & take money out of the portfolio to fund a trip, renovate your home, or buy a new car
- That you move funds around repeatedly as you tried to find the specific sector outperforming the rest of the market.
In short, you would have to treat your investment portfolio the way you treat the equity in your home.
Don’t think about it. Don’t look at it. Don’t consider it available to withdraw for any reason. Don’t worry about the year-to-year fluctuations. Just let it sit over there in the corner.
Think about it this way...we all seem to intuitively understand that the market value of your home really doesn’t matter unless you are planning to sell. Who even knows what your home can go for until you’re getting ready to move?
And yet, we know, at all times, the market value and the performance of our investment portfolios when it should be the exact same thing!! If you are not trying to sell, because this money is set aside for long term future goals & you understand your investment purpose, we should not be concerned with the middle.
The takeaway: Our own behavior & our expectations drive our perceptions around investments & performance to a far greater extent than we think.
And this makes sense because financial planning does not take place on a spreadsheet. It takes place in your head & at your family dinner table!