Shares vs. Property: Where Should You Invest?
A war has long been waged in the investment world over whether shares or property should reign supreme.
IBISWorld founder and chairman Phil Ruthven is a vocal critic of home ownership, and tries as often as he can to debunk common property myths.
However, according to the 2011 Census, 67 per cent of Australian households are owner occupiers.
With record low interest rates, and the spectre of the global financial crisis fresh in our minds, property is often perceived as a safer option.
ME Bank group executive sales Angela Middleton says to get quality advice for your own circumstances and do your research.
“Whether you choose one or the other or indeed both ultimately depends on your knowledge of and experience with each asset,” she says.
Here are some key lessons to help put you on the right path to finding what works for you.
Which ever you choose, there is no such thing as a guaranteed winner.
Mr Ruthven advocates buying the index – a cross section of the entire stock market – rather than trying to predict which companies will outperform the rest.
You can’t really do this with property, unless you have an enormous amount of money.
The Successful Investor managing director Michael Sloan, who is also an external property investor to the National Australia Bank, says property is safer than shares, but admits that most people don’t do their research and “stuff it up”.
Which performs better?
According to a report from the ASX, Australian shares had a gross return of 9.2 per cent in the 10 years to December 2013, compared to 6.1 for residential investment property.
But over 20 years, the result is much closer. Shares still had a higher return at 9.8 per cent, but residential property was just behind at 9.5 per cent.
Your super funds are in shares
According to Mr Ruthven, most super funds invest between 60 and 65 per cent of their assets in shares “because they know full well nobody’s ever beaten shares over any 10 year period”.
But if you don’t want to try shares yourself, and you don’t need to retain access to your money, your super fund can do it for you – in the form of additional contributions up to a concessional cap which is age dependent.
“If you’re investing in shares through your super fund, you’re only taxed very lightly going into your super fund,” he says.
Think harder about whether to borrow
You may have been told that rent money is dead money, but Mr Ruthven says this old adage is “ridiculous” and “absurd” and that the interest charged on your mortgage is really where your hard earned gets flushed down the drain.
But once you have debt (which you probably do), Mr Sloan says paying this down is probably a better option than funnelling money into the stock market because it is “guaranteed wealth creation with no risk.”
Are you ready for the long haul?
Even if you have bought a terrible investment property, time heals all wounds, according to Mr Sloan.
“You can make money on a bad property if you keep it long enough,” he says.
According to Mr Sloan, up to 25 per cent of people sell within a year, which means the real gains are lost.
Don’t live in the home you buy
Despite his war on housing, Mr Ruthven concedes that buying an investment property and continuing to rent, is “a very close second” to shares.
Shares still win, he says, but investing in a rental property is a “smart, two-bob-each-way kind of decision.”
ABS data from 2009-10 shows households renting from a private landlord paid an average of $305 per week, compared to $408 per week by those with a mortgage.