There Goes the Neighborhood

January 4, 2013by Hoy Grimm0

After the recession, homeownership has declined to near 50-year lows. Multi-family (i.e. apartments) housing starts jumped dramatically in October while single family starts declined. This can create a variety of difficult-to-solve problems for the dwindling group of owners. These problems stem from the same basic element—rental occupants aren’t making a long-term commitment which allows them to save money in the short run.

What motivation would a short-term renter have in repainting their rented space or keeping their yard in tip-top shape? If you found out that a used car you are considering was part of a rental fleet you would mark it off your buyers list because of the likelihood of abuse.

Owners have committed more time and financial resources to their purchases and therefore have more at stake. They have an incentive to exercise greater care for their purchase than a renter.  

Unfortunately, the same dynamics have surged into investment markets since 2008. The current crop of brokerage advertisements displays a similar theme. Everyone has tools to help you be a better trader. One ad even shows a guy trading on his phone while waiting to pick his kid up from the school bus stop. 

Trading isn’t ownership, it is renting. Traders place short-term bets on the table and are ready to close them out in days, if not minutes. In their quest for short-term profits, traders can bet on price increases or price decreases (short selling). Traders who use leverage in its various forms are trying to gain the benefits of ownership without the financial commitment of a long-term investor.

If you are the latter, consider how this impacts your investing “neighborhood.”  As you patiently build your investment account or 401K around reliable long-term holdings, these short-term renters are undermining your efforts by creating price uncertainty. They thrive on market volatility because it gives them more opportunities to profitably trade in and out of a position.

Long-term investors need to acknowledge the effects of short-term trading on their long-term holdings and adapt their investment philosophy to accommodate higher volatility. At LeConte Wealth Management, we use broad market exposure, sector valuation analysis and economic trend analysis to reduce risk and rebalance our client portfolios.

The notion of “buy and hold” turns a blind eye to the risks inherent in today’s trader-driven markets.

 

Hoy Grimm

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