Property Versus Shares – Which is Better?

property_versus_shares

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.

Value Investing

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.



8 Responses to Property Versus Shares – Which is Better?

  1. As a USA Realtor, I have been putting together Return on Investment (ROI) reports of current listings in the Orange County, Southern California area for several investors who have pulled their funds out of their portfolios. On thing that I found is that every single property that was in close to turnkey condition resulted in an immediate return of 6 to 10 percent before including the tax benefits. This extraordinary opportunity is not being lost on even the casual investor and is one of the main reasons that the inventory of homes has been dropping so quickly. Still even with inventory at an all-time low, the combination of 3.5% fixed interest rates, local prices far below world market levels, and very high rental demand has created one of the most lucrative investment opportunities in history.

  2. Nice article. I think that shares and real estate are two totally different investments. I’d go so far that I claim that shares investments is rather gambling than investing. I know that your intention was writing about long term investments but let’s be serious, since 2008 none of us has any desires leaving our many on the stock exchange market for good.

    Real Estate on the other hand is per definition a long term investment. It’s very hard to make a short term investment out of it unless you are a big investor.

    What I want to say is that both investments have their right to exist should be considered “better” or “worse”. They are just simply two very different investments. In my eyes are shares a short term investment and real estate long term.

    Thanks for reading.

  3. I think I prefer property with land not just condo or apartment

  4. I think investing in real estate is much more beneficial than investing in shares. There are various advantages in investing in real estate because there is very less chance of loss as compared to shares.
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  5. Education and research, I think, seem to be the best ways to protect yourself if you are considering either option to invest your hard earned money. Make sure that you understand the risks involved, take advice from trusted sources when possible and never take a gamble if a drop or loss will leave you in dire straits – those are my simple tips anyway. Many thanks for this well written article.

  6. Basically, the things that an individual must take into consideration when making a decision on how they want to invest their money are:(1)the amount of risk that the investor would be willing to endure (2) availability of financial resources.

    Investing in shares is more risky than investing your money in properties. But some investors are willing to invest in these type of investment because they know that the higher the risk they confront the higher the return that they could get in the future. People who often gamble in these kind of investment are the people who have more than enough fund to wager. On the other hand, people who are expecting for a sure profit prefer investing in properties since it poses lesser risk to your investment.

  7. I think this will depend on the risk that you would be willing to take. If you want a higher return with a higher risk, then investing in shares is right for you. On the other hand, if you are not an adventurous type of investor then just go property investment.

  8. Personally, I would prefer to invest in property instead of share market. The risk is much greater in shares compare to property market.

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