This week we tackle the eternal debate – which is better, property or shares?
We all know the great Australian dream is to own your own home. But, is that really the best way to build up your wealth? Or should we be considering alternatives like shares, instead?
Well, like many of the other eternal debates – Ford or Holden (Ford!), cats or dogs (dogs!) and sweet or savoury (sweet all the way!) – there is no one right answer to the property or shares debate. It’s different for everyone.
So if you’re trying to decide where to put your hard earned cash, doing your research and understanding the pros and cons of each is the best place to start – so here’s my take, to get you thinking about what’s right for you!
Understanding Asset Classes
Shares and property are just two forms of what we call ‘asset classes’. An asset class is essentially a group of investments that share similar traits (e.g level of risk) or behave in a similar manner.
The main asset classes are cash, shares, property, bonds and fixed interest. Ideally, when you are building an investment portfolio you want to make sure you are reducing your risk by investing in multiple asset classes. This is because when one asset class goes down in value another might go up. How do you decide how much money to put in each asset class? Well, that is a story for another day.
Our perceptions about property
Aussies love property. It’s in our DNA. And I think its because a house is a real thing, made of bricks, that you can see, touch and sleep in – so it feels like a more secure investment. But that doesn’t always make it so.
- The pros:
Property has proved to steadily grow over time (just don’t ask anyone living in WA, NT or ACT right now)
- There can be tax advantages to owning investment properties in the form of negative gearing
- Investment properties are tangible
- They offer both capital growth and an income stream (rent)
- You can borrow money with relative ease to invest in property
- Selling a house takes time (often months), money and paperwork! So if you need access to money quickly because of an emergency, then selling a property isn’t a fast or straightforward way to cash in. Property as an investment is not liquid.
- It takes a large lump sum of money to get into the property market and in most cases you’ll still need to take out a long term home loan, so the financial investment is significant upfront. There are also hefty fees associated with buying and selling property, like stamp duty, legal fees, real estate agent fees and even Lender’s Mortgage Insurance.
- Due to the costs involved with buying property it means more of your money is tied to one investment and so it can be difficult to diversify. So if you only have one investment and that is an investment property, you have put all your eggs in one basket. You have bought one house, in one area, so all of your risk is tied to one thing.
- There are ongoing costs associated with the upkeep and maintenance of the property, agent fees, as well as risks of tenants causing damage or not paying rent on time.
- Despite popular belief, property can and does go down in value too! Just take a look at property prices in parts of WA as an example.
Our perceptions about shares
When it comes to shares, we hear a lot of the bad news. The GFC, big market crashes, the ASX going down. All the media coverage tends to make us think that shares are too volatile and risky and often result in losing money. What we don’t hear of so much on the news are the big gains and comebacks, because let’s face it, good news stories don’t sell as well.
- It’s much easier to diversify with shares. You can purchase small parcels of shares in various different companies and industries to spread your risk.
- Shares are relatively quick and easy to buy and sell, so if you needed money in your bank account this week, selling any shares you own would make that possible. Transaction costs are also generally low.
- It’s much easier to start small, investing little sums of cash to build up a portfolio over time.
- Shares can offer both capital growth and income (dividends).
- Unlike property, shares do not come with ongoing costs such as maintenance.
- Like property, shares are a long term investment and have also shown to steadily grow over time.
- The share market can be volatile and prices fluctuate daily.
- They’re often mistakenly viewed as a short term investment, but shares in general perform much better over time as sporadic peaks and troughs can tend to balance out more evenly over the longer term.
- They’re a less understood form of investment so require more thought and advice when investing.
- There is more risk involved with borrowing to invest in shares and the loans are more complex.
In the end, the key to successful investment really is to put your fingers in all the pies and invest in multiple asset classes including property and shares. By spreading your investments across various assets you’re better able to spread your risk and ride through any stormy weather more smoothly. But remember, with all investment comes some level of risk – even with property!
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The information provided by Women with Cents is general in nature. It doesn’t take into account your objectives, personal financial situation or needs. Think of it as educational material in which to help you make more-informed decisions. We recommend you obtain financial, tax and credit advice specific to your situation before making any investments or financial decisions.
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