Many home-owning clients need to start thinking differently about their houses to ensure their investment portfolios are balanced, and advisors can help educate them.
To create a balanced portfolio, clients first need to realize that their house is an investment, says Robert Stammers, director of investor education for the CFA Institute in New York. “Any homeowner is already an investor, whether they think they are or not,” he says. “For many people, housing keeps them from creating a balanced portfolio because they don’t think of themselves as investors.”
By talking to clients about their goals for their home and retirement, advisors can get clients in the right investment mindset about their house The client has to have a plan in place, says Stammers, about what he or she intends to do with the house. Otherwise, when it comes time to sell, the client may hesitate because of their emotional attachment to the property.
“Get your clients to understand what their future goals are and then what are they going to do to unlock the equity in their home,” says Stammers, “or if they are going to unlock the equity in their home.”
As well, when constructing a homeowner client’s portfolio, it’s important for advisors to steer clear of other housing related investments, says Stammers, and investments that are highly correlated to the housing market.
Contrarily, Keir Clark, branch manager and senior wealth advisor with ScotiaMcLeod Inc. in Fredericton, does not agree that a client’s personal home should be looked at as a focal point of his or her investment strategy. Clark does, however, believe that it can be difficult to persuade clients who like to buy multiple properties for investment purposes to diversify their portfolios.
“It’s a very significant challenge to have people understand that although they’re incredibly comfortable with being able to drive by [the property] or walk by it or shovel the walkway or walk through the woods,” he says, “it really is a very focused and, often, a very illiquid asset.”
The reality is that while people are comfortable with real estate and trust that it will increase in value over time, says Clark, there are instances when other investments may out perform real assets. “For example, had you bought shares of Coca-Cola 25 years ago and bought a piece of real estate 25 years ago you may be better off with Coca-Cola,” he says. “But nobody would believe that.”
As such, advisors should talk to clients about the importance of diversifying their investment portfolios beyond real estate. Clark suggests asking clients to forget that the investment in question is property and to instead make a straight comparison between it and another asset class.