Property vs Stock: Why you should invest in both
Statistical analysis shows that over a long period of time the returns of both property and shares are relatively similar. If the property market going sideways, you might prefer to put your available money into stocks. Then, when the property market shows life again, you can put more of your money
The debate as to which is the better investment for your hard-earned money, property versus shares, there is a countless amount of data and opinion.
And the obvious problem is personal bias. In preparing to write this article I did a little bit of a google search on the topic, and wow there are some very strong opinions on this topic.
In a number of cases, writers declared their bias and proceeded to explain why they were right, whether it was property or shares.
One thing that was very clear, as is the case with any statistical analysis, the outcome was very dependent on the period that you consider. What I was able to deduce from my research is that the returns on both property and shares are relatively similar over a long period of time.
Sure there are times where one outperforms the other, but over time the data suggests the returns are very close. Again, looking over a number of pieces of data from reputable sources, the average longer-term gains are around 7% to 9% per annum. Not bad right?
So rather than try to convince you that one asset class is better than the other, I want to explain why it makes sense to be in both.
What type of investor are you?
When it comes to choosing, it’s a good idea to know the type of investor you are or want to be over the long -term.
There are a few factors to consider in deciding, including:
- Do you want to be an active or passive investor?
- What is your risk appetite?
- What stage of life are you at?
Active versus passive
This is something I ask my clients early in our conversations, although in my opinion, the line between the two is a little blurred.
Effectively a passive investor is someone who wants to set and forget. Make the investment and let time and compounding do its thing.
This is commonly referred to as the buy and hold type investor.
So the alternate, the active investor, is someone that wants to monitor markets and be active in making revisions to their holdings in the event of changes in the markets.
These investors are more interested in timing the market then a passive investor.
The reason I suggest the lines are blurred is that it is not truly possible to be entirely passive. It is highly recommended that you monitor your investments at least monthly, and where market conditions dictate, you take action.
Nobody wants to be hanging on to a stock if it is crashing to non-existence as a few have in the past. Anybody remember Babcock and Brown?
Now the other consideration here will be your past experience. If you have never invested before, you are likely going to want to be an active investor, well that is what you tell yourself, but being a little passive to start out is a good idea to learn the ropes.
When it comes to property versus stocks, obviously stocks are far easier to be an active investor. Property, on the other hand, leans to being a more passive investment, although there is still some participation to maintain the records, tenants and maintenance.
This is where there is the potential for the most significant variance between stocks and property.
Obviously, you can invest in stocks from as little as $600 for a marketable parcel of stocks, whereas a property in any Australian city these days is several hundred thousand dollars. So it is a bigger investment, which brings more risk.
The counter-argument for property is that it is highly unlikely that a property would ever fall in value to zero dollars, which as we know is possible with stocks.
So risk is a big deal. Especially when you add in leverage, which is normally the case with property purchases.
Stage of life
Your stage of life is an interesting factor, mainly because most people think the older they are the less likely they can make good, life-changing returns.
For me, this factor is about deciding what you want to achieve, and what you want to leave for your family.
If you are selecting good quality properties or stocks, it doesn’t matter what stage in life you are at! Either stocks or property are going to provide the ongoing returns that I mentioned at the start.
This factor may be more important when you are considering the first two factors I mention, but rarely should it be the deciding factor.
What are the pros and cons of property?
I don’t have the space to go into detail on all the pros and cons here, so here is a high-level overview of things to consider.
Each asset class has it’s risk, as long as you know in advance what they are, you can manage them.
What are the pros and cons of stocks?
Should you invest in both?
This is where my bias comes into the equation, as I am a believer in being in both. So rather than recommend one over the other like most articles on this debate, I prefer you look at putting some of your investment dollars in both property and shares.
With a little bit of time and experience you can learn when it is better to invest in one over the other, but with a plan to be in both for the longer term. That is, if the stock market is crashing or going sideways, you might prefer to put your available money in property, providing it is not also falling.
Then, when the stock market shows life again, you can put more of your money into stocks. This way you are building the value of your investments in both over time and likely at prices that enable you to get not only the historical average but maybe a little more too.
Let’s face it, there is only one Warren Buffett, and he has spent all his life learning and participating in the stock market to be able to outperform the averages in the way that he has. For the rest of us mere mortals, it makes sense to concentrate on making informed investment decisions, investing in good quality assets, to achieve above-average returns over the long term.
Andrew Woodward is a mindshift.money accredited money coach based in Sydney who teaches people to take control of their money and invest for their future, simply and efficiently. Sign up for his free weekly money tips at theinvestorsway.com.au.