This is not a property investing tip, but it is a topic you will probably have to consider at some stage, if you haven’t already.
For personal investing, the decision as to whether to put your hard earned cash in property or in shares is always hotly debated.
As someone who has put their money in both property and shares, I think the decision as to whether to invest in one or the other (or both) comes down to your level of acceptable risk and the time frame of investment.
Investing in Shares
The first thing I will say about investing in shares, is do your homework! The sharemarket is full of penny-hopefuls and hot tips (that rarely come to fruition).
Your share investing strategy will depend on whether you are trying to make money in short term trading, or long term investing.
I am not going to talk much about short term trading as I don’t know much about it and it is not really considered “investing”.
Like the property market, the share market is cyclical and heavily tied to the state of the national and global economies. You may have heard the terms “bear market”, which is when the market is dropping and “bull market”, which is when the market is charging ahead (going up).
Also, like the property market, there will be micro-markets within the broader share market that may be doing well when other areas are struggling. For example, Australia has recently gone through a mining boom and there has been alot of investment going into mining companies.
On the other hand, the retail sector has been performing poorly as consumers are worried about spending too much money.
I found out about “value” investing about 18 months ago and it made perfect sense to me. Basically it was about finding companies with a good competitive advantage, that are making a good return on equity and that have good prospects for growing earnings over the next few years.
The advantages of value investing are:
- You are buying shares based on the company performance, not on speculation
- You are using a common reference point for comparing the price of companies, which allows you to identify the cheap ones (this is called Intrinsic Value)
- You are forced to evaluate the company on it’s metrics such as cash flow, return on equity, payout ratios and yields
Having said all that, my share portfolio is significantly down since I first got into shares.
Even with the knowledge of value investing, the market as a whole has still dropped 10 to 20% since I got into it and that is just bad timing.
However, making mistakes in the share market is the only way to learn and I am hopeful for a better return moving forward.
This brings me to the main point I want to make about share investing. It is not for the feint-hearted and if you cannot handle seeing your money drop 10 to 30% in a few months which can easily happen in the current bear market, stay right away.
However, as much as downside can be large in this market, the upside can also be great (if not better) when the market and economy inevitably bounces back.
The keyword here is VOLATILITY. The share market moves up and down every day. The property market does not.
Investing in Property
Having seen first hand that the share market can be highly volatile and reactive, it’s great to have an alternative vehicle to invest our money in.
Now don’t get me wrong, certains areas of the overall property market can be volatile. Boom towns can have large increases in prices over many years, driven by a major industry (such as mining) succeeding in the area.
But if the industry moves away, they can quickly become ghost towns and property prices will return to much more realistic levels.
Looking at the residential property market though, long term price appreciation is seen as much more consistent and linear.
Residential property prices can and do go down at times, but over 10 to 20 year periods they are more than likely to go up in most areas.
Return on Investment
When you are looking at shares or property to see how much you can earn on your investment, there are a few things to consider.
At the end of the day, if you are a careful investor, you can probably earn 10% per annum return (average per year) over 5 to 10 years in either shares or property.
With shares, you can borrow to invest (margin lending) but this adds a much bigger risk when the market goes down. This is called a margin call and means you have to tip more of your money in to maintain your required equity level or be forced to sell of shares at a loss.
The risk of borrowing with property however, is not as great. If your property drops in value, the bank does not force you to put more money into the loan nor are you forced to sell the property.
So investing in property or shares will depend on your accepted level of risk, whether your are investing short or long term and the type of strategy you are comfortable following.
The important thing is to educate yourself sufficiently no matter which path you may choose.