Investors need to constantly assess the risks involved in any investment they make. Those that don't expose themselves to the risk of being caught in an unexpected trading halt when everything goes wrong like at Newsat Limited (ASX: NWT).
What is Risk?
For the readers who haven't had the pleasure of studying risk as part of their professional development or formal studies, risk is made up of two components – likelihood and consequence, where the best risk is one of low consequence and low likehood and the worst is the opposite. Businesses perform risk analysis regularly for safety; but we also need to do a risk analysis before we invest in a company.
HOUSE PRICE CRASH
I can see it coming, at some stage in the next five years I'm relatively certain that the front page of the Australian will read "HOUSE PRICE CRASH". So in terms of likelihood, over my investing timeframe of 10 to 15 years, I can be relatively certain that house prices will fall at some point.
Assess Your Portfolio
What impact will a crash in house prices have?
My most immediate thought is the impact it will have on discretionary spending; see if people that own homes and investment properties feel like they have 'lost' money in their house, then they're less likely to pop into Myer Holdings Ltd (ASX: MYR) and buy a new dress, grab a pizza from one of Retail Food Group Limited's (ASX: RFG) pizza chains, or invest in a new computer from JB Hi-Fi Limited (ASX: JBH). Consequence: Medium
I also worry about the impact it could have on stocks exposed to an aging population. Companies like Estia Health Ltd (ASX: EHE) and Japara Healthcare Ltd (ASX: JHC) rely, in part, on retirees being able to invest large sums of money to get into an aged care bed- this could be at threat if house prices retreat and they can't get the desired price for their family home. Consequence: Medium
Residential developers and building supply companies will be impacted by lower demand as investors try to avoid catching a falling knife- think Lend Lease Group (ASX: LLC) and Cedar Woods Properties Limited (ASX: CWP) in addition to building supply companies including DuluxGroup Limited (ASX: DLX) and James Hardie Industries plc (ASX: JHX), which have had extremely strong profit growth recently. Consequence: High
I expect banks will also struggle. Lower asset values could prompt write-downs and although it's unlikely that interest rates will rise as a result of falling house prices, there's a good chance the two will coincide, prompting a return to more normal levels of bad debt impairments for the likes of Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corp (ASX: WBC).
So how do you protect your portfolio?
