Asset allocation: Creating wealth, Protecting wealth and feel good…..
Not sure if it is a coincidence that the number of investors in equities and equity mutual funds is falling. Most of these people are presumably buying property all over the country. You see a big jump in RE prices even in smaller towns like Kolhapur, Salem, Rajkot, Madurai and of course a runaway boom in Patna, Raipur, Indore, Bhopal, etc.
So people come wanting to do financial planning – with a hi beta RE portfolio – saying ‘I have 3-4-5 properties in various parts of the country and it is worth Rs. 5-6-10-12 crores.
As a financial planner what does one do?
Imagine people with networth far beyond their dreams (and earnings too – this supposed net worth is on paper as of now) with a high beta portfolio giving them tremendous self confidence as if they had EARNED THIS money.
What is the risk?
Most of these properties are under construction, or being used by parents, siblings, kept locked etc – and there is no CASH FLOW arising from that. It is a fond hope that the RE growth trajectory will remain the same! This complacence gives them a feel good factor, allowing them to spend all the current income (I mean a substantial part – apart from the never ending EMIs).
So far so good. Now if a 53 year old has all his net worth in RE and hopes that the RE will ATLEAST DOUBLE over the next 7 years. This will allow him to retire peacefully – well this is what he thinks! Nothing wrong. Except that if RE over the next 10 years was to give him -40% returns, he would be devastated.
It is quite normal for people to create wealth with just one asset class – but the challenge lies in protecting it over your own lifetime, and beyond. So a man like Azim Premji whose wealth has been created from the market capitalization of Wipro ALSO needs to diversify into other equities, venture capital funding, angel funding, debt, real estate etc. This is not necessarily a wealth creation device – it is more a wealth protection device.
And ha! your feel good can completely disappear and your goals become IMPOSSIBLE TO ACHIEVE if the RE market falls say 40%!
You think this is impossible? Think again – Mumbai was this in the late 90s, and Japan saw its real estate fall, hold your breath, by about 99%. LOL except if you were holding RE in Japan…
IsItPossible
Don’t you think “creating wealth” is an art!!!
Very few people have mastered that art, for most average normal people it is either by chance or by inheritance… probably that’s why statistically most lottery winners end up bankrupt or far less money than what they had before they won the lottery towards end of their life.
VK
sometimes our calls on RE purchases can be dicey but other times it’s pretty alright. Back in 2004, I bought plot in Bangalore for ~Rs.6 lacs. I plan to sell it off soon with in a year or so. Current market price is ~82 lacs. Even with 20% tax on the LTCG, it’s not too bad with about a 28% or so CAGR..
Radhe (Raj Singh)
Mumbai saw its Property prices crying in 1996. I am waiting for it to happen Once More.
Pravin
those who bought RE between 2001 end and 2005 are in less danger of losses simply because the inflationary boom was just being started .first the stock market went up zooming and everyone was on about india becoming a superpower very soon.the people with money from the stock markets bid up the prices of scarce RE and that went up.next the richer/more affluent people started buying property looking at the possibilities and they too were rewarded.soon everyone joined the party. the people at the end are the most vulnerable and will remain so -that is the nature of booms and busts.
Prasanna
VK,
Great. You are trying to sell it (Today’s date : 25th Oct). Let us know once you sell it for 82 lakhs.