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Investment Strategies: High Volatility Markets

As I begin analyzing a variety of markets, I thought I would quickly share some tips for investment strategy consideration. In thinking about an investment strategy it is important to consider the volatility of the market you are investing in. For example, a market like Los Angeles might see double digit growth one year and negative growth the next, while a market like Chicago might see low single digit growth one year and simply lower growth the next.

When thinking about whether or not to get into a market early vs. late and when considering whether to get out early vs. late, it’s important to understand the market dynamics. Consider a market like Los Angeles. Over the past 20 years, this market has seen growth as high as 33% to as low as (25%) in one year. From 2001 to 2006, LA experienced double digit growth every year. Conversely, from 1991 to 1997, that same city experienced negative growth every year (data from Case Schiller Home Index).

In a market like this an investor is better off getting in early and getting out early. If you are a year early, you might experience one year of negative growth, but you would then be rewarded with rapid growth. Even if its not double digit growth, it will trend significantly higher than the national average. On the other hand, it also benefits those investors to get out early. Given the rapid change in markets, a double digit growth year could easily be followed up by a double digit negative growth year. Getting out early and moving to a safer market would typically be better than staying even one year too long.

Less volatile markets afford investors the opportunity to wait and see. Markets like Chicago experience much slower growth trends and decline at a much slower rate. In these markets it’s smarter to invest after the market has begun its rebound because the growth from year to year is rarely significantly different. Additionally, investors aren’t penalized by rapid negative swings as much. Typically investors might experience slower growth, but rarely will it be negative.

Keep this in mind when I suggest investing now. This advance is clearly not for all markets. But for markets with significant upside and high volatility, early may not be as bad as some might have you think. Don’t be afraid of -5% or -10% growth, when the possibility of 15%+ growth is possible.

Additionally, when the market is down you have your pick of the properties with little competition. As the market heats up, so does competition for the best properties. A property that could have been purchased at a steep discount with seller financing in the best neighborhood will be the first to go as the market heats up. While timing is important, sacrificing perfect timing can yield positive results.

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