Is Your House All You’re Coming Home To?
Written by Hartford Investments
Real estate is an important investment, but it should be just one part of a diversified investment plan.
As we sit on the cusp of the summer cocktail party season, you can expect your social conversations to go something like this:
“Beautiful weather isn’t it?”
“Where are you going for your vacation?”
And ….
“Did you hear how much the Jenkins got for their house???”
Monitoring neighborhood home prices is as common as walking the dog these days – and about as frequent. And why not? The Canadian real estate market is the boom that never seems to end. In its 2008 Spring National House Price Survey, Century 21 found that prices over the past year increased in 167 neighbourhoods surveyed, remained flat in nine neighbourhoods and declined in 21 neighbourhoods. That’s pretty good news for most homeowners. But if you owned a house in Saskatchewan, you were really feeling good. Homes there gained a whopping 38% in value between March 2007 and March 2008.
And that’s pretty much been the story of Canadian real estate for years now. If one market, say Toronto, appears ready to wane after a lengthy upward run (returning 5% year over year to March 2008), another city, like Saskatoon, jumps up to take its place. Which means the debate about whether your home can also be a retirement investment seems a bit moot. Whether we like it or not, the value of our homes is central to how much we’ll have in retirement. And so it should be. Real estate is an entirely viable asset category, the same as stocks and mutual funds and subject to the same cyclical value changes, too.
Some people forget that last point, so we’ll repeat it: Just like any other investment, sometimes the value of real estate drops.
Forgetting that fact is understandable. Real estate as a pure investment gets clouded by a couple of factors. The first is that it’s pretty hard to be dispassionate about your home. Having a big asset – and for many their biggest asset – surrounding you every day tends to skew your feelings when it comes to rationally considering real estate in the context of a broader investment portfolio. People love their homes in a way no other investment could possibly match. So asking someone to take the emotion out of investing when their home is part of the mix is pretty much a non-starter.
The second factor is even more important and relates to the party conversations you’ll be having this summer. Real estate is the one asset class everyone can relate to. The same people who leave their mutual fund statements unopened for weeks, are the first to go to the “open house” when the home across the street goes on the market for $50,000 more than the owners paid for it. Ask an investor to name more than two funds they’re invested in – and what their value is – and more often than not you’ll get a blank stare. Ask the same person how much their home is worth and you’ll get it down to the nickel.
Don’t give your home all your financial attention
The bottom line is that as an asset class real estate gets more attention than it rightly deserves if you’re considering your home as just one piece of your investment plan. That focus can skew people’s thinking to the point that real estate becomes the foundation of their financial plans, rather than just one component. And as even the most novice investor will tell you, that breaks the first rule of investing: Diversification.
A well rounded financial plan should expose you to all types of investments, subject to your risk profile and personal goals. Covering off core investments in equities – both domestic and international – and fixed income solutions is essential to ensuring your portfolio is diversified and balanced. That way you minimize the risk of being too focused on a single asset class when that class hits a down cycle.
The funds available through Hartford Investments are designed to provide investors with the investment foundation they need. They cover four basic asset classes: domestic and international equity, balanced solutions and fixed income funds. Asking your Wellington West Investment Advisor to invest in a fund from each class is a simple way to accomplish your diversification goals. Or you might want to talk to your advisor about Hartford 3-PAK Flex, a simple three-fund solution with the flexibility to adjust the allocation to each fund, depending on your risk profile.
The one aspect about your home as an investment that we haven’t talked about is how much of your capital is tied up in this asset. Most homeowners want to maximize the money they put down on their house to lessen their interest payments. That makes perfect sense. However, in practice, it often means that the money you have available to contribute to other investments is proportionately reduced – sometimes to zero.
It doesn’t have to be that way. One of the best ways to ensure that you stay invested in asset classes like equities is to use dollar cost averaging (DCA). DCA is the technique of buying a fixed dollar amount of an investment – such as an equity mutual fund – on a regular schedule, regardless of market price. That way, you buy more when stock prices fall, and less when they go back up again. The other benefit of DCA is that it makes it easy to get started building a diversified investment portfolio, even if the bulk of your capital is devoted to your home.
Hartford Investments has come up with a program that extends the benefits of DCA even further. Hartford DCA Advantage Program actually pays you interest on money waiting to be invested, rather than have the money you’ve set aside for DCA just sitting there. That way, you’ll end up investing more than you originally planned, giving you an extra step up in building your portfolio.
The smart approach is to use a professional
Finally, if you really want to ensure your investment planning is sound, visit a Wellington West Investment Advisor. Your advisor can look at all your assets – including real estate – and build a financial plan that works for you.
Continuous or periodic investment plans neither assure a profit nor protect against loss in declining markets. Because Dollar Cost Averaging involves continuous investing regardless of fluctuating price levels, you should carefully consider your financial ability to continue investing through periods of fluctuating prices. Please see the prospectus for full Dollar Cost Averaging (DCA) Advantage Program details. Hartford Mutual Funds are available only by prospectus and only in those jurisdictions where they may be lawfully offered for sale and therein only by dealers registered to sell such units. Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that a Fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in a Fund will be returned to you.