One of the key concepts that successful investors understand, regardless of the market in which they invest, is that of risk and reward. Every investment carries a degree of risk, but successful investors are able to quantify and understand it in terms of the associated potential reward, and will only invest if the deal fits their appetite for risk.
How are successful investors able to make accurate judgements of risk? By ensuring that their knowledge of the circumstances associated with the deal in question is as deep and comprehensive as possible.
The broader your knowledge the lower the risk
Investment risk arises because of a lack of knowledge about the future behaviour of a market. The less an investor knows about the future behaviour of a market, the greater the risk. Conversely, the more an investor knows, the lower the risk. Knowledge is the key to reducing investment risk as far as possible.
Obviously, we can’t see into the future and divine what is going to happen in a particular market – we can never achieve zero risk. However, by arming ourselves with as much knowledge as possible, we can reduce our risk to acceptable levels.
Knowledge is power when it comes to investing, and knowledge is what gives successful investors the edge.
Most people who invest realise on some level the importance of knowledge. For example, around one in seven Australian taxpayers own an investment property, and the vast majority start out by investing within 10km of their home. These people understand that the local knowledge they have is a valuable asset when it comes to investing in property in the area. However, many haven’t taken the next step and used this knowledge to judge whether the potential reward justifies the risk. They also haven’t considered acquiring knowledge relating to other markets in order to make comparisons and identify the best deals.
This often happens simply because beginning or part-time investors sometimes don’t know where to look for information about property markets far removed from their locality. The good news is that in this digital age there is a staggering amount of information relating to individual property markets, available to anyone with an internet connection. The bad news is that it can be very difficult to know where to look for quality data, and to make sense of it once you’ve found it.
The vast amount of statistical data relating to property sales, rental vacancy rates, changing rental yields, auction clearance rates, shifts in population dynamics and public investment is enough to make anyone throw their hands up in frustration. Add to the mix the abundance of property commentators, each with their own predictions ranging from economic ruin to paydays of astronomical proportions and everything in between, and it is no wonder that acquiring quality knowledge to inform an investment decision is so difficult.
- How to Find the Next Boom -
On August 8, I will be releasing a new ebook entitled How to Find the Next Boom, which details my method for acquiring the knowledge needed to make informed investment decisions. Using readily available tools and data sources (most are free or very inexpensive), it will enable you to gain the key to property investing success – maximum knowledge and insight into a market. Best of all, the method empowers YOU to take responsibility for your investing success, and removes reliance on buyers’ agencies, expert advice, or luck.
How to Find the Next Boom will be released here on BFTKT and on my website, Freedom Through Property. Make sure you claim your copy when it is released August 8!