The Behavior Of Tiny Houses
By Roger Nusbaum, AdvisorShares ETF Strategist
Jason Zweig had an interesting article about behavioral finance that focused on both the tendency of investors to overestimate what their returns will be and the tendency to avoid information that might be upsetting like looking at account balances when things are going well but stopping when things are going poorly. As is often the case with these articles the comments are worth reviewing as well.
Zweig cites one survey of investors who expect a balanced portfolio to have an average annual return of 8.5% which he notes actually exceeds the average annual return of just equities. It’s worse with institutional investors who expect 20% annually from venture capital investments.
Overestimation of returns stems from optimism (not a bad thing in most aspects of life) and over confidence. The over confidence angle is akin to asking a room full of people whether they are better than average drivers…just about everyone thinks they are. It is crucial to realize that for every investor, every single one, there will be times that they underperform and times that they outperform. Over the long run that investor might be a little ahead or a little behind the market (most will be a little behind).
Let me be very clear about being optimistic, it is best for almost all aspects of life, I’ve disclosed before being a believer in things like the law of attraction, the secret and the others but expecting less in the way of long terms returns makes more sense. No one is hurt or forced to change their pan if the rosiest scenario comes to pass. Quite obviously, a portfolio that averages 15% per year will result in having much more money than a portfolio that averages 4%. Someone planning for 7% who then gets 15% doesn’t have to adapt to anything but something big will have to give for that same person who only gets 4% versus that 7% expectation.
The idea of avoiding bad news doesn’t have to be terrible if you’re sense of reason tells you that al bear markets end and then go on to make new highs but your emotional side might cause a panic sale upon seeing a portfolio drop of X%. Denial about financial reality is a different matter like a 60 year old who should have $600,000 accumulated but who only has $125,000 and doesn’t see a problem.
Pivoting to tiny houses which we haven’t discussed in quite a while. The very short version of my take on these is that very small houses (not necessarily on wheels) can be a financial solution for retirees who come up short in their retirement planning/saving.
With no Red Sox game on Monday night, my wife and I watched a couple of tiny house shows on HGTV including one about a 24 year old financial advisor who decided she didn’t like her career choice, she instead wanted do something with dogs (doggy daycare) and live in a tiny house to offset having very little income.
My wife asked a great question, “do you think that in 10 or 15 years all these twenty-somethings will look back and wonder what they were thinking?”
If you care enough about investing to read a blog like this then maybe you defy some of the societal statistics that grimly show that no one has accumulated any money for retirement or home purchases. If that is the case you probably started in your 20’s or maybe early 30’s and hopefully are close to where you “should be” for your age in terms of savings.
To the extent that people in their 20’s or early 30’s today are not doing starting to accumulate would seem to compound the threat of many Americans not being prepared for their futures.
The idea of having a smaller financial footprint is great but not at the expense of personal accountability and paying at least some dues. Part of it is a failure to think about the long term. At 25 it is very difficult to conceive of what it is to be 40 but it comes quickly and can be quite young (I think 51 is quite young). Having several financial options available at 40 (or any other age) by virtue of having paid some dues, put a little bit away and having a little home equity will be a much better spot than being 40, un hirable for a lack of experience, having a couple of thousand in a savings account after years of making $1500/mo and now after 15 years needing to possibly refurbish your tiny house.
While this characterization could be extreme or unfair… maybe it isn’t. Check back in 2030.