While there are strong factors favouring both strategies, it is agreed on by both sectors that whichever path you choose, diversification is the key to developing a safer, and most likely better investment portfolio for example, investing in shares from different sectors and investing in property in different states and/or price range.
The first steps in deciding which is the best choice for you is considering the timeframe in which you wish to hold your investment, what return you wish to achieve and how much risk you are willing to take on.
Shares and property are very different investments with different features which is why it is important for you to take into account your personal circumstances, constraints and goals.
Residential property - done well - is a very powerful wealth creation tool which has a lot of evidence to back it up:
- Property has a historical pattern of steady growth. (prices doubling on average every 7-10 years).
- It displays less volatility than shares. Because 70% of the property market is owner-occupied, home owners are less likely to sell their homes when the market is low whereas shareholders often divest which causes reduced share prices and volatile investments.
- Historically, shares can fluctuate by 30-40 per cent in any one year, this gives little clarity or comfort to the value of investor’s portfolios.
- Unlike shares, property is unique. For example when purchasing property you have a little bargaining power through negotiation, where shares must be purchased at a market rate at the time of purchase.
- Property allows an investor more control with the ability to renovate or re-develop and the choice of how your property is utilised – tenanted, vacant etc. Shares are controlled by the company’s management teams and not by you!
- On a risk weighted basis, property outperforms shares when looking at volatility. This is the reason banks will lend 80-90 per cent on property but will only lend 50-60 per cent on shares. Because property has the ability to be leveraged, it outperforms in the long run.
So property vs. shares? Each have considerable points, but based on history in the markets; property is showing to be a safer investment choice.
Nobody expects either to shoot out the lights in 2013, so along with your circumstances, a long time view is vital.
Remember, though, each individual investor has a different set of needs and is looking for different outcomes, so it is always best to seek independent advice from a financial planner or similar, in order to discuss the best plan for your particular circumstances.
Josh Vrsaljko is a director at Zac Investments. If you have a question email: askanexpert@wsba.com.au
