Property or shares… why don’t we have both?
Property or shares? Experts will tell you a well-rounded investment portfolio includes both investment types, among others, and they’re right.
But for those starting out, what are the merits of each investment strategy and what do they mean for you?
There is no denying both investment vehicles have created significant wealth for astute investors. And, while there’s no right or wrong answer regarding which is the best option overall, there are fundamental differences that set them apart and determine their suitability for you.
What’s the difference?
Of course, the biggest difference between the two investment vehicles is cost; cost to buy and cost to trade. Direct property typically requires greater capital to invest and has a high transactional cost due to tax and legal and services fees associated with the sale or purchase. For this reason, it is considered a long-term investment and is therefore infrequently traded.
On the other hand, shares are relatively inexpensive with low cost entry and comparatively low transactional costs, which means they can be traded daily. Also, unlike property where investment growth and profit is best measured over years, share growth and decline can be measured daily and so can its returns.
The second biggest difference between shares and property is the state of the holding or degree of liquidity of the asset. While shares are considered liquid and based on a paper economy, property is considered illiquid and is a tangible asset, the value of which is underpinned by land and improvements (building).
There are many differences between these two investment vehicles, but it is these two fundamental distinctions (cost and liquidity) that create the divide between those who primarily choose to invest in shares and those who opt to invest in property. That’s because of the perceived exposure – or risk – that each brings.
When short-term needs take priority over long-term plans, illiquid assets such as property can prove problematic for those who need quick access to liquid funds or cash. A property can take weeks, or even months to sell. However, property in many cases represents a relatively low-risk, long-term investment asset class, because it’s less exposed to the impact of wavering or short-term changes in economic conditions. Because property values change over a period of years, slight fluctuations are eliminated with prices generally weathering any minor decline. But, like shares, all property performs differently, with selection the key factor to long-term investment performance.
While property has its own set of risks, so too does the share market. In a paper economy, share values are closely tied to the underlying health of an economy. They are subject to daily fluctuations, impacted by movements in currency value, employment, interest rates, commodity prices, GDP and geopolitical factors to name just a few; and they can respond dramatically overnight.
For this reason, bricks and mortar are typically more popular during a downturn and are considered a haven for investors seeking a more stable investment.
Figures show Australian residential property values increased by 9.0% in the 12 months to June this year, boasting an average annual growth of 7.0% per annum over the last decade. In average terms this means annual growth of more than $50,000 in the last 12 months, and growth of more than $309,000 over the past 10 years for property owners whose property is on par with Australia’s median house price growth trend. During the same ten-year period, Australian share market prices grew by a comparable 7.1% per annum.
Despite disparity in performance at times, a long-term comparison of residential property and shares reveals very similar returns. As markets respond to changing conditions, asset selection (meaning the type of share or property) is increasingly important and depends upon investors’ individual circumstances and appetite for risk.
There is also evidence of change to risk appetite as confidence in property markets surges as a result of record low interest rates.
But remember, regardless of which investment vehicle or asset class investors select, it’s subject to the same principles of trade – buy low, sell high and buy for growth.