July 6, 2009
Education in Real Estate Investing: the best risk mitigator
Education is paramount to success in any endeavor but when we are speaking of investing it is most important to consider its impact on risk.
Investing is widely regarded as a risky pursuit by amateurs and those who are uneducated in the field. To professional investors, a person’s education or knowledge of an investment is by far the single greatest determinant of risk. A well-educated investor can always walk away from a ‘risky’ deal.
A lack of knowledge sees so-called investors get into difficulty time and time again. Whether it’s the first time investor who just bought a house in a bad location that is losing money or the guy who thinks he’s smart because he has a nice paper profit after some blind luck in a stock market boom. Chances are that if they don’t know what they are doing they are headed down a bumpy road.
In fact, the second guy will likely have far lower lows because he’s on a high, feeling cocky and taking risks; as if his lack of education isn’t enough. Although, he IS about to get an education and an expensive one at that! Since he could be bothered getting educated from others’ experiences the market will give him the experience and education first hand.
The risk equals return mantra may hold some truth for the amateur investor who passively buys retail investment products. But then the products that fall into the “low risk” category could also be seen as risky because the returns are virtually non-existent. If you’re betting your future on that, many would call THAT risky. So this just reiterates the fact that investing is most risky for those who remain uneducated.
“What if I employ the services of a financial advisor?” you may ask. “Aren’t they educated?” Well, they are to a degree but you would be surprised how little confidence you have in many financial advisors after you’ve educated yourself a little.
Professionals will only help you in the long term if there’s something in it for them. That’s perfectly okay so long as you understand it, after all why shouldn’t they benefit from helping you? But the only way to make sure your needs get top priority from your investing is to take the driver’s seat yourself. In other words, don’t outsource the ultimate responsibility of knowledge acquisition and decision making.
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Its these amateur investors that are partially to blame for some of these foreclosures. Of course, the media has to carry part of the blame. All of these television shows that show how easy it is to make money investing in real estate only threw gasoline on the fire.
Your absolutely right… I used to laugh at these amateurs at the auctions when the market was going upwards and they would buy a house at retail and sell for 30% more a year later and they considered themselves experts.. but now they are in a bad position because they are all upside down. They never bought real estate with equity from day one. The funny part is when they did get lucky they never spent a dime on getting educated to become a professional and really start making money.
I like the point you made about getting an expensive education by losing big, but that is probably good for experience though, me, I will play it small for awhile…
Education Education Education! Absolutely! In the biz they say location location location but when making real estate an investment choice there is so much more to consider. Great post!