HousingToday

Property versus Shares: a practical comparison

As a completely independent advisor, I have no vested interest in how my clients invest.

Whether they invest in property, shares, or any other asset class makes no difference to my life.

Of course, I want them to invest in

  1. assets that are most appropriate for them and
  2. assets that provide the highest returns without taking an unacceptably high risk.

I know that if I help my clients invest successfully, they will continue to remain clients, and therein lies my firm’s success.

Often investors contemplate (and compare) investing in either property or shares.

The property versus shares debate is meaningless

It is often debated which asset class is better, property or shares.

I view this debate as arguing which golf club is best.

Each club has its unique purpose, and the reality is that golfers need many clubs in their bags to play well.

Investing is no different. Investing in a mixture of asset classes allows you to balance out the pros and cons of each asset class at a portfolio level.

Ignoring any one asset class in totality gives rise to higher investment risk as you are putting too many eggs in one basket.

In summary, I think shares and property are equally good asset classes.

I believe that most investors should invest in both.

I believe that if you employ an evidence-based approach, in the long run, the investment returns produced by property and shares should be materially similar.

The big difference is an investors’ appetite for gearing

Most people feel more comfortable borrowing to invest in property but less so with shares.

There is a good reason for that.

The chart below is from my book, Investopoly.

It sets out the long-term returns and corresponding volatility of each asset class.

Chart1 Sw

The average volatility rate (or standard deviation) for shares is 20.9% and the average long-term return is 11.6% p.a.

To put this in non-mathematical terms, two-thirds of the time, you can expect your annual return from shares to be in the range of -9.3% and 32.5% (being plus or minus one standard deviation from the average).

And 95% of the time your return will be between -30% and 53% (plus or minus two standard deviations).

That is a very wide range, right?

VolatilityAnd that is why shares are seen as volatile, as the return can vary significantly from year to year.

However, residential property is a lot less volatile.

Two-thirds of the time your return will range between 0% and 20%.

And 95% of the time, between -10% and 30%.

Whilst this is still a wide range, it’s a lot tighter than shares.

That is why people feel more comfortable borrowing to invest in property because the likelihood of experiencing a loss year (just after you have borrowed to invest) is relatively low (i.e. there were only 6 loss years between 1980 and 2016).

How to borrow to invest in shares

I would almost never recommend someone borrow a large lump sum of money and invest it in shares in one tranche, for the reasons described above i.e. volatility.

Instead, I would usually recommend investing in a series of regular and relatively small tranches over (hopefully) many years.

Doing so helps you spread your market timing risk.

Borrowing Money2This can be a very effective strategy as explained in this video by Vanguard (watch from 1:30min).

Source link

Related Articles

Leave a Reply

Your email address will not be published.

Check Also
Close
Back to top button