{"id":2519,"date":"2022-05-08T10:09:04","date_gmt":"2022-05-08T10:09:04","guid":{"rendered":"https:\/\/royabhishek.in\/urbanbuyer\/playing-the-long-game-is-not-always-easy-but-it-is-the-most-powerful-approach\/"},"modified":"2022-05-08T10:09:04","modified_gmt":"2022-05-08T10:09:04","slug":"playing-the-long-game-is-not-always-easy-but-it-is-the-most-powerful-approach","status":"publish","type":"post","link":"https:\/\/royabhishek.in\/urbanbuyer\/playing-the-long-game-is-not-always-easy-but-it-is-the-most-powerful-approach\/","title":{"rendered":"Playing the long game is not always easy but it is the most powerful approach"},"content":{"rendered":"

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In my book,\u00a0Investopoly,<\/em><\/a>\u00a0I outlined 8 investing rules that if followed, will help you build wealth and avoid making costly mistakes. <\/strong><\/p>\n

\"Investing\"These 8 rules are evidence-based which I have refined over the past 20+ years.<\/p>\n

Rule number one is; to play the long game<\/em>.<\/p>\n

Arguably, it\u2019s the most important rule because I\u2019ve observed that this is the most common mistake investors make i.e., they don\u2019t play the long game.<\/p>\n

Whilst this rule is simple to understand, it’s often very challenging to follow.<\/p>\n

Short term profit does not create long term value<\/span><\/h2>\n

Which investment option would you prefer (you can only pick one)?<\/p>\n

\"ShortInvest in an index (share) fund which will accumulate $500,000 of additional wealth over the next 10 years or follow a \u201cstock tip\u201d which will generate a $50,000 profit within 9 months?<\/p>\n

Unfortunately, many investors would pick the stock tip option.<\/p>\n

They might justify their decision by planning to invest in the long-term option after they have banked a quick profit, but they rarely do. Instead, they search for the next short-term hit.<\/p>\n

To many, making a quick profit feels less risky than waiting 10+ years for a much larger gain.<\/p>\n

Three reasons short-term opportunities are inferior<\/span><\/h2>\n

I recently came across an investment opportunity to complete a 4-townhouse development which was projected to generate between $460k to $550k in pre-tax profit (which equated to a return of between 15% and 18%).<\/p>\n

It may take 2 to 3 years to complete this development.<\/p>\n

Of course, an alternative to this investment is to purchase a\u00a0high-quality, investment-grade property<\/a>\u00a0and hold it for the long term.<\/p>\n

This is a better option for 3 reasons (which is why I didn\u2019t pursue the property development).<\/p>\n

(1) Risk-adjusted returns<\/strong><\/p>\n

Risk<\/em> refers to the chance that your actual returns will vary from your expected returns i.e. that the investment doesn\u2019t achieve what you expect.<\/p>\n

Low-risk investments produce very predictable returns, such as term deposits \u2013 as the return is virtually guaranteed.<\/p>\n

An investment\u2019s volatility rate is a good measure of its\u00a0risk<\/em>.<\/p>\n

You cannot compare two investing options without also comparing their inherent risk.<\/p>\n

This is called a\u00a0risk-adjusted return<\/a>.<\/p>\n

Over long periods of time, a high-quality investment property (house) should produce an average capital growth rate of at least 7% p.a. to 8% p.a. plus a net (after all expenses) rental yield of at least 1% p.a. I have previously calculated that Australian property has a historical volatility rate of circa 10%.<\/p>\n

Property developments can present several risks including cost blowouts, failure to achieve your desired sales price due to changes in the market, adverse changes in planning rules, and so on.<\/p>\n

For the sake of this example, let’s apply a volatility rate of 30% (for comparison, the share market\u2019s volatility rate is circa 20%).<\/p>\n

The Sharpe ratio is a commonly used methodology for calculating risk-adjusted returns.<\/p>\n

A higher Sharpe ratio is better as it means you receive a high return per unit of risk.<\/p>\n