Is it better to invest in property or shares?
In the past 20 years, residential real estate gained an edge over shares, so is it better to invest in property or shares?
Choosing between shares and property can be confronting for investors.
And it is easy to understand why: both asset classes traditionally perform extremely well.
In the past 20 years, residential real estate gained an edge over shares. The most recent long-term investing report — released by the ASX and Russell Investments in June 2018 — revealed residential investment property returned 10.2 per cent over a 20-year period to December 31, 2017, compared with 8.8 per cent for Australian shares before tax.
So it would seem the shares versus property race couldn’t get any closer, but what factors should investors consider when deciding between investing in these two asset classes? Is it a question of predicting which will be the better investment – shares or property — over the next 20 years?
Given investors can’t rely on past performance as an indicator of future results, it really comes down to five 5 factors:
1. Total returns (capital and income)
Do you need to generate income? If so, you can from both types of investment. That is, you earn money from a residential investment property via rental payments, while dividends are another way of generating an income stream from a share portfolio.
2. Getting started
How much can you spare? Starting out investing in shares requires only a relatively small amount of capital so entry, exit and holding in this market is cheaper and easier compared with property, which has higher start-up costs in terms of entry price and stamp duty.
3. Needs and circumstance
The right investment depends on the individual investor. An investor has a number of things to consider such as how long the money can be invested, the level of returns sought and the amount of risk the investor is willing to accept.
4. Marginal tax rates and gearing
Many investors aren’t aware that tax significantly changes returns on both asset classes, particularly for those on high tax rates. That’s where gearing comes in because it can enhance returns for investors at the highest and lowest marginal rates.
5. Time – do you invest in shares or property?
Investment time horizon: compounding provides a cumulative effect to total returns.
It’s a lot to think about but your most important investment decision will be how you spread your money across the asset classes. For example, shares can incorporate Australian and international stocks, while property could include listed, commercial and residential.
The ASX advises that having your money spread across a range of assets will decrease your overall risk. For example, within shares it reduces the impact on your portfolio if one or two companies perform poorly. However, it really pays for investors wanting ongoing successful returns to learn more about all asset classes [not only shares and property], and seek solid professional advice to develop a diversified investment strategy.
For more information about shares, ASIC publishes a handy guide to shares.
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