Let’s not get irrational!

The Capital Asset Pricing Model (CAPM) depends on an array of variables to remain relevant. One particular variable of significance, particularly with property investment, is that the investor is rational, is driven by aversion to risk and is seeking the maximum possible return for a given level of risk.

Too often, the CAPM is challenged by poorly informed property investors. Why is this the case?

Australians are notorious for our absolute love of property investing. Obtaining one’s first investment property at 21 years of age is not a particularly irregular occurrence for Australians, whereas it is for our cousins in the United States and United Kingdom. They’ve even said so.

Does our love of property stem from a kind of simpleton ‘Aussie battler’ notion that we can see and feel, as opposed to shares or other financial assets which are digits on a screen? Hopefully not, otherwise that makes me nothing but a simpleton analyst.

In truth, property is so appealing due to the control that the investor has. Typically, property is held by an individual, family trust or partnership. Financial assets, however, give the investor very limited control, if any, to proactively manage the asset’s growth. Of course there are many other benefits of investing in property including leverage, risk, taxation policy and the like.

The other side to this coin, however, is that the tangible nature of property investment allows the investor far more opportunity to behave in an ‘irrational’ manner. Here at Blue Wealth, we address irrational behaviour in various forms including the herd mentality, attachment to marketing material and short-term market sentiment to name a few.

If you’re keen to invest in Australia’s favourite asset class, make sure you lead the pack by maintaining an investor’s mindset. The best way to do this? Rely on the data, the hard facts and the research from experienced professionals rather than relying on emotion and advice from ‘backyard economists’. If you do so, it is a proven fact that you are exponentially more likely to join the highest echelon of property investors in Australia.

Remember, less than 1 per cent of Australian adults hold more than two investment properties, and ‘irrational market behaviour’ is the number one attribute of those who don’t reach this tier.


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