The property versus shares debate

In times of boom and bust, it’s hard to have a rational discussion about different assets! Opinions tend to move to the extremes. We hear statements such as “shares are too risky but you can’t lose with property” or “the property bubble will burst soon”. After all, everyone is entitled to his or her opinion.

There are undoubtedly shares that are “risky” and property that will be sold at a loss, but before putting any of your hard-earned money into any type of investment, always take the time to stop and revisit the fundamentals of each asset class.

Perceptions of risk

We all worry about making a loss on our investments.  Share prices are publicised daily and volatility makes investors jittery. It is sometimes hard to avoid the temptation to sell.

On the other hand, house prices are not completely transparent and you only know the value when you put your house up for sale.

Because you can’t see the value of a property every day, it doesn’t feel so risky. However, the high entry and exit costs, lack of liquidity and the costs of maintaining the asset make property risky in a different way. Investors in property are more likely to see themselves as long-term investors because of this different perception of risk.

Yield

The yield on property will fall if rents are unable to rise with capital values. Conversely, as share prices fall the dividend yields on shares will rise. In recent years, net yield on property (after rates, insurance and maintenance) has been as low as 2% pa, whilst the yield on some shares exceeded 9% pa, and add to that the tax benefits of imputation.

Supply and demand

Capital values in the shorter term are ultimately driven by how many people are buying and selling. Being an astute investor means you must pick where the future demand will be and not just jump onto the bandwagon when it is already rolling. Technology shares in the late 1990s and the over-supply of inner city apartments are good examples.

Buy value

A key to successful investing is to buy cheaply. One way to assess a price is the Price/Earnings ratio. This shows how many years of earnings from an investment will be needed to buy the asset.

The conclusion

Property and shares will have a place in many portfolios, but it’s all about getting the right balance for you. Always talk to a professional adviser instead of listening to would-be “expert” opinions.

Call us today if you need to bounce any investment ideas off us!

KK’s gut instinct

Buy property in the US, wait for the Aussie dollar to hit 60c, sell and reap the rewards.

Now, tell me what your gut instinct is telling you, by posting a comment below:

Sporting tip of the month

You can’t go Bart Cummings during the Spring Racing Carnival, his average is one Melbourne Cup every 4.5 years