A funny thing happened to me recently that completely changed how I think about investing.
A few months ago I sold my house and moved into a flat. At my age, with a family, what you’re supposed to do is sell your house and move to a bigger house, or one in a better neighbourhood. But we didn’t want to deal with the stress of finding a new house while selling an old one – it felt a bit like trying to thread two needles in a single motion. So we signed a rental agreement with a new block of flats in town, deciding that we’d wait a while and watch the property market.
It’s a nice place. My monthly rent is quite a bit higher than my mortgage was at our house. Because of this, I thought our finances would suffer in the short term until we bought a house. But that isn’t what’s happened. To be honest, I’ve never felt more secure in our finances. I’m able to invest even more than before, and budgeting has never been easier.
Why? How can I be spending more, but doing better? Well, it took a while, but I’ve worked it out. The answer is volatility, something I talk about all the time with investing but didn’t truly understand in my bones until now.
When I owned my house, my mortgage was cheap, but my actual expenses month-to-month were very volatile. For three months I wouldn’t spend a pound, then the roof would leak and I’d lose a small fortune getting it patched up. To try to prepare for this, I made a savings account and tried to set aside a little each month for home repairs. But this drove me mad at times because I never knew if I was saving enough. Or maybe I was saving too much, and all that money was just sitting around doing nothing when I could have invested it. I never knew because I couldn’t predict the future. But I tended to over-save to calm my fears.
And it wasn’t just the repairs. When we owned a home, we had dreams. There was no end to our home improvement dreams. While we lived there, we built a patio. We upgraded the heating. If we stayed, we wanted to add another floor to the house; we wanted to turn the garage into a living space with a studio; we wanted to add central air conditioning. If you have any experience with this stuff, right now you’re thinking: “Wow, all those projects would cost a fortune!” And you’d be right! We spent thousands and thousands on our house. We saved quite a bit of our income toward home improvement dreams. And whenever we came into a bit of money, our first thought was what does the house need?
Now, as a renter, I no longer dream. I’m actually not allowed to alter our flat even if I want to. And if the roof leaks now, I call the maintenance man. Not having to puzzle out how much to put aside for house emergencies has been such a mental relief.
What’s funny is that I’ve thought about volatility in investing for years but never applied it to housing. When you invest in riskier products like shares, you’re likely to make more money, but at the expense of more volatility – meaning more ups and downs in the short term. When you invest in bonds or cash you’re likely to get a lower return, but less volatility. Put another way, with bonds or cash you’re potentially paying more (in lost gains) for more stability. Just like with my flat.
Now, when you’re talking shares versus bonds or owning a home versus renting, no one can tell you that one is the right answer. It’s a personal decision based on how much risk you feel you can handle. I always thought I loved risk, but selling my house has taught me that I love predictability in my finances, too. I love it so much that I’m willing to pay extra for it.
Photo: Claudio Testa