I know that this sounds like a very business orientated article title, but believe me when I tell you that it is completely applicable to almost anyone looking to invest their money in hope of making more. It is also completely relevant to anyone that has had a baby, which is precisely what has been keeping me extremely busy of late.
Before I give you a couple of scenarios, it is probably worth explaining the concept of a J-cure and showing you what this looks like. A J-curve is essentially the path of your return on a new investment. If you consider the graph below, then it is easy enough to see that the return is negative after the initial investment to a certain point, then slowly curves and starts to rise into the positive. What we end up with is a curve that looks like the letter ‘J’ and probably some worry and sleepless nights during the initial stages as well.
The J-curve is a classic representation of just about any investment, but most people tend not to think about them because they only have the end in sight and simply expect an increase in their investment. Unfortunately the reality is that an investment is almost never a once-off activity, it can often require the addition of subsequent funds or some serious patience through a slow beginning at the very least.
J-curves and property
I have experienced a J-curve every time that I have purchased a property and the journey can have some demoralising effects. The cause varies in each instance, but the result is the same and it looks something like this:
You negotiate the purchase price of a nice rental unit and feel a sense of triumph, this is the beginning of your empire! You finalise the loan details and realise that you have to pay the difference for the quarterly unit block management fees (enter the J-curve). You manage to find a tenant and they move in – success! shortly afterwards the hot water system dies and you have to shell out for a new one. Just to round things out, the air conditioner packs it in and the taps in the bathroom start leaking… you start to develop a deep loathing for your rental unit and swear off investing for good. Welcome to the bottom of the J-curve.
Fortunately your run of bad luck can’t last forever and there are only so many things that need fixing. Over time the rental income only needs to fund your loan payments and some may even end up back in your pocket, or paying down the principle. Congratulations, you have successfully negotiated the J-curve.
Quite a ride eh? A friend of mine recently documented his J-curve adventure when he bought a 4-plex and encountered a similar experience, he came out the other side ok, but it is worth understanding the additional expenses that you could incur when investing in property. You can read all about Joe’s experience in his first 3 months report.
J-curves and shares
Most stock market investors like shares because there is nothing to fix and no tenants to worry about. While this is true to some degree, it is still really easy to experience a J-curve though and depending on your investment strategy, some can still cost you more than you think:
You have had some success in the share market in the past and want to try something new to better leverage the money you have to invest so you try margin lending. It’s ok though, because you have the full amount you borrowed in the bank, you just don’t want to tie it all up. Your shares and travelling along nicely until you wake up one day and the market has dropped, your share vale declines over time and your loan gets called in. You pay the loan and now have all of your money tied up in shares that aren’t worth what you paid for them. Rock bottom of J-town!
Fortunately you were smart and went for blue chip stocks that recovered with time as the market strengthened. Your shares make it back to the amount you paid for them and continue to grow in value, even better you get a dividend that you can reinvest and the tail of you J-curve grows magnificently.
J-curves and parenthood
I’m now on baby number two and loving every moment, although I can certainly liken some aspects to our J-curve model:
You wait patiently for 9 months and are rewarded with the miracle of birth. By some stroke of luck the doctors and nurses at the hospital judge you competent enough to take your child home with you and you drive so slowly its another miracle that you make it before the child’s first birthday. Once home, you get swallowed up by the monster that is parenthood; changing nappies, feeding, cleaning, washing and attempting the impossible feat of catching up on sleep.
In almost no time at all you are out the other side and have a child that looks nothing like the wrinkly ball of skin that you were given at the hospital. As hard as it is to believe, every day is better than the next and you love it so much that you and your partner start talking about doing it all over again!
Hopefully I have managed to convey the features and effects of a J-curve to you in a way that makes some sense and drives home the point that investments are rarely successful straight away. If you are patient though and understand the path of your investment, then your preparation before and patience during the process makes the ride a whole lot smoother for everyone involved.
Have you ever experienced the J-curve?
Image by micagoto