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 visible 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, gross rental yields on property have hovered around 3.3% pa, whilst the yield on shares has averaged around 4.2% 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. The over-supply of inner city apartments in most major cities is a good example.

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 consultant instead of listening to would-be “expert” opinions.

Note: past performance is not an indicator of future results.

Disclaimer: This article contains information only and does not provide advice in any form.

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