21 Best money tips ever: My take on Robert Shiller’s advice

by Nick on August 9, 2010

This is my second post in my CNNMoney.com “21 best money tips ever” series where I give my take on some very successful businesspeople’s thoughts on money.

I had fun with the first one.  Let’s dig into number 2, from Robert Shiller, straight from the slideshow:

Look beyond your home

Robert Shiller
Yale economist who correctly called the bubbles in real estate and tech stocks

Best advice I can give: People are mistaken about the long-run gains they might make in real estate. I put together a home-price series going back to 1980. And it’s wrong to think real estate investments as a group will have to go up much in price.

Best advice I ever got: There is a financial adviser here in New Haven, and he would say, “When you are making investments, try to transport yourself to an island and overcome bias toward home investments.” 

My take on his advice:
He makes a very good point about peoples misonceptions about real estate.  And we all should consider this when we’re thinking of investing in real estate or a home for our families.  How many times have you been stopped at a red light or driven down a road and seen a house or building and thought “why would anyone want to live there” or “there’s no parking, how could anyone make money running a business there”?  (I realize times have changed with “the Internet” and parking isn’t a necessity for some businesses  because of that or other reasons (i.e. they’re in a city), but if you had the type of business where you didn’t need a storefront with parking, would you need a building on the side of a road?  Probably not.  You could probably just do it from home.). 

The point is real estate in general is not a guarantee of success.  Some neighborhoods are dependent on one or two businesses.  Some are dependent on a military base.  Some are neighborhoods in transition.  What happens if the business goes bankrupt?  The military base closes?  Or the neighborhood becomes dangerous?  Well, I’m not entirely sure what will happen, but I’m pretty sure what will not happen.  I’m pretty sure the property values will not skyrocket. 

So if you choose to buy real estate do so because it makes sense to you or your business, not because it’s your golden ticket.  It might not be – even in the long term.

My take the best advice he ever got:
I agree generally with this advice that you shouldn’t limit yourself to American investments, but not at the expense of informed decisions.  Buying a random Brazilian bank’s stock because you want to “invest abroad” is probably not a good idea.  But if you research foreign investments and are comfortable that you know the potential risks, rewards and factors that affect the performance of the investment, then maybe it’s right for you. 

Bottom line:
Buy real estate if it makes sense for you.  For example, my wife and I may be looking for a new house or condo soon.  We could afford a fairly nice place conservatively, but if something happened and we needed to move, the rental market here wouldn’t support the monthly costs.  So we’re looking to sacrifice a little for a better contingency plan.  We’re looking for houses or condos where with 20% down our costs would fit in our budget and before-tax total monthly costs could be more-than covered by market rent.  We’ve seen a few places available like this so we’re confident we can find a place that fits our criteria when we’re ready to buy.  We won’t just buy a place because it is convenient, nice, big, priced right or any other single reason.  We will buy a reasonable place that provides long-term stability for our family and reasonable monthly costs.

And invest in what you know.  If you don’t know it learn it.  Foreign or domestic doesn’t matter.  What does matter is that you do your homework, understand all risks information relating to the investment.  Don’t limit yourself by geography.  But don’t go abroad just for the sake of going abrad.

And, of course, until next time – put the credit card down and slowly step away from the mall!

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