Saturday, March 27, 2010

Is the investment in your house an Asset or a Liability?

Let us debate if you consider the investments made in buying your flat as an asset or is it a liability? I am not expecting consensus on this as a Home is a very emotional subject. But emotion generally degrades Financial Wisdom. There is a stark difference in investing in real-estate and investing in a house. I had invested in a house in 2002 and today if I look at the returns it generated, it might have doubled or a little more. If I analyse a bit further, I need to take into account the interest paid to the bank over the last many years, the society maintenance paid to maintain the complex, my own house maintenance, property taxes etc.
The asset has only lost more money than having made any returns. An asset that generates returns is what an asset is. Now I know of other friends who live in a better and bigger house. So I have decided to buy a new home that costs 3 times more. How do I make it happen now? Well I am going to look out for a better pay job, I should get at least a 50% Hike. I have got a Job. So what has happened? I have increased my Income to meet with higher expenditure, out flows and EMIs. What have I exactly done? Have I invested in an asset? Is it going to generate more income for me or is it going to deplete the Income from my new Job for which I am going to work harder? I realise now that I am stuck in a Rat race. We are in a race, a race of which most of us are a part of. More money is definitely not the solution to Money Problems. The solution is to consciously reduce expenditure, avoid investing in liability because that causes more expenditure like interest payments, maintenance etc., and instead invest in assets which generate income. That’s the secret of the turning wealthier.

Many investors with a strong equity portfolio in early 2008 remained spectators when the portfolio took a hit due to the events that unfolded during the year. They had then exited at lows. The portfolios eroded by almost 60-80 percent. As the markets turned the tide and rallied, many of these investors did not buy any stocks with the belief that the rally will be a short-lived one. The rally, however, was not a short-lived one and is still going strong nearly a year after it began.

The US Fed's decision to keep the interest rates low for an extended period indicates that the higher liquidity will probably extend the rally by a few more months. In that case, what should investors do? How should they get back into the stock markets to start earning returns? Let me know your thoughts.


Best Regards,
Naresh