Maybe it’s the aftermath of Purim still lingering in me that makes me want to address the subject of myths that masquerade as truths. Or maybe the Pesach holiday and its emphasis on freedom gives me the added incentive to free us from the shackles of falsehood.
In any event, here are a few investment-related apparent truisms that I would like to examine more closely.
- Investments in the stock market average 10-12% over time.
- Israeli real estate always goes up.
- Israeli real estate always outperforms the Israeli stock market.
- The general direction of the shekel vs the major currencies can be predicted.
Myth 1: Investments in the stock market average 10-12% over time
Investments in the stock market are volatile. That’s the reason why retirement plans that are set up years before they are needed will contain a higher percentage of investment in stocks, which are often adjusted to a lower percentage as the investment time horizon shrinks and we approach the period when we need to access our savings. The bulls and bears of the stock market are testament to the fact that there are always periods when the market is buoyant and prices rise, but they are balanced by times when prices drop. Thus a person looking at their investments during a bear market will see relatively little profit over a number of years. And no-one can foresee the timing or duration of either type of market. The American market strength over the last eight years, and over the last three to four years in particular, has allowed it to outpace the Israeli market. But looking at returns over a longer time horizon still leaves average gross returns closer to eight percent, before taking into account transactions and management fees, and taxes. A far cry from 10-12% net returns.
Myth 2: Israeli real estate always goes up
Since 2008 housing prices in Israel have been on a seemingly endless and unbreakable upwards spiral. Recent governments have been forced to think creatively and attempt to introduce initiatives to break the prohibitive price increases, which have risen out of all proportion to salaries, leaving a huge percentage of the population unable to afford a home. But a look at other periods of time including the years between 2000 and 2008 shows that real estate prices actually can drop and even stay low over extended periods. And it seems that the current government’s initiatives are having an effect, with property prices in some areas dropping, and in other areas stabilizing. And whereas the housing statistics being produced are sometimes conflicting due to the numerous factors involved, the fact that almost all sources report fewer homes being sold and are now talking about dropping and stabilizing house prices as opposed to rising ones, is managing to break the public’s perception of the myth that Israeli real estate always goes up.
Myth 3: Israeli real estate always outperforms the Israeli stock market
At a recent press conference Carnit Flug, current governor of the Central Bank of Israel, compared the short and long-term results from investing in the housing and stock markets. Whereas over the past decade investment in real estate yielded a higher return than investment in the stock market, if we look at a longer time horizon such as the last 30 years, the stock market has consistently outperformed the housing market, whether we are looking at 5, 10,15 or 20-year average rates of return. The average annual return on investment in stocks over the thirty-year period, using the Tel Aviv 125 Index as a benchmark, was over 7.5% gross and 6.06% net. In comparison, the average annual return on investment in a residential apartment over the same period was 5.76% gross and 4.87% net, and for government bonds the figures were 3.48% gross and 2.66% net.
So while real estate prices have risen well above their long-term averages in the last decade, it is unreasonable to assume these gains will continue. Reversion to the mean is expected and we will likely see stock market returns again surpass the housing market.
Myth 4: The general direction of the shekel vs the major currencies can be predicted
At this time of writing the shekel dollar rate is approximately NIS3.45 to the dollar. The reality is that long gone are the days when the old shekel was an unstable currency, and even real estate deals in Israel were denominated in dollars rather than shekels. A combination of the strong economy and effective Bank of Israel policies means that the NIS has become a force to be reckoned with. Current attempts by the Bank of Israel to temper its strength have not been terribly effective as speculators bet on a stronger shekel. So the myth that says ‘NIS3.45/$ is really low, it’s for sure going to go up’ is exactly that – a myth. No-one can say for sure which way a currency will go, especially in the short term. By definition the current rate is the equilibrium and there is as great a chance the dollar will continue to weaken as strengthen. While the government would undoubtedly like to prevent too strong a shekel, their success in weakening the shekel is not guaranteed.
What is the secret behind successful investing? Everyone wants to make money from their investments while minimizing the risk level. And whereas no investment ever comes with a guarantee, recognising the differences between investment truths and myths will increase your chances of success. Myths, when repeated often enough, take on the guise of truth. Take the time to truly determine what investment statements are myths rather than facts in order to improve your chances for long-term success. Behatzlacha!
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