”Buy and hold” still the best strategy

Last week I spoke to the New Zealand Property Investors Federation.

The speaker before me was a successful Australian investor and she outlined all of the different ways that people could make money out of property – trading, development, flipping, do-ups, rent to buy and so on (there were about a dozen of them).

The speaker talked a lot about her experiences of selling property – owning for a couple of years but then selling and taking a profit.

As I listened, I thought that all of these things involved a lot of rushing around – a lot of activity without, maybe, a lot of money made. Moreover, many of them seemed to me to be quite risky; it is easy enough for the market to turn in the middle of a trade or a development.

I have always thought that in both property and shares, the long-term investors are the ones who make the real money.

This, in property circles, is called “buy and hold,” and involves simply buying quality property, keeping it well leased and letting time do its work.

If there was ever a lazy way to riches, a long-term investment approach is it. And so, when I got up to speak, I told a story: back in the 1970s, I bought my first investment property.

Uneducated and inexperienced, I did everything wrong: I bought a section (which creates no income) and did not borrow.

Nevertheless, even in youthful ignorance, I sold the property 18 months later for 67 per cent more than I paid for it.

Before anyone gets too excited, here are the numbers: I bought the section for $1500 and sold it for $2500.

The numbers are small but even so, this was the 1970s and it seemed like a grand amount of money at the time.

However, it turns out that I made one other big mistake – selling the property.

This was the point of the story for the conference: once I owned the property I should have just held on and, in fact, I should still own the property today.

I am told that this section today would be worth at least $250,000. If that is right (and I have no reason to doubt it, as the section was big and probably capable of several units) the annual rate of return on my capital would have been nearly 14 per cent a year.

That is a great return with no work to do and little cost (just some rates to pay).

Warren Buffett has proved it with shares and others have proved it with property. Buying good assets whether companies or property and holding for long term growth is the best strategy for the vast majority of people.

Trading and all the other high energy activities are full of risk and will usually result in a poorer outcome.

Yes, I should have bought an income earning property and I should have used gearing – but, most important, even though a quick profit was nice to have in my pocket, I should never have sold.

Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. He is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com.

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