Delicate time for investing
Published in the Courier Mail, April 2009
In these dark financial times, is it better to put money into shares or property? Alex Tilbury finds out.
Are you someone who pores over the stock tables in the paper working out how much your share portfolio makes or loses on a daily basis?
Or can you be found in the real estate section, researching where to buy your next investment property?
Some people are diehard stock pickers while others love the fact they can see and touch their properties.
The truth is there are good things in both shares and property and savvy investors need to have their radar open to opportunities in both.
Interest rates are historically low which makes borrowing money cheap.
Macquarie Bank interest rate analyst Rory Robertson says the RBA remains under pressure to cut rates at pretty well every board meeting for the next year or two as unemployment trends higher.
"Unfortunately, in terms of jobs-market performance, Australia's current recession is starting to look more and more like our savage recessions in the early 1980s and early 1990s.
"Also, disturbingly, the steepness of the uptrend in our unemployment rate is starting to look more and more like the serious uptrends elsewhere."
So unless you have a secure job, investing right now in shares or property must be well researched and done with your eyes wide open.
Analysts will tell you that shares are much more liquid, which just means you can cash them in quicker and usually have the money in a few days whereas property is a trickier asset to sell.
It takes time to off-load a house or apartment and you can't just sell off the back steps if you need $15,000 to buy a new car.
Property lovers can get quite emotional about their houses and stock trading is not for everyone.
Investing directly in the sharemarket requires skills and research as there are more than 2000 listed companies in Australia.
That's not including the myriad of different fund managers, index players and financial planners who will happily invest your money for you but at a cost.
Always remember though that where there is debt there is risk nothing is guaranteed. That much ought to be clear given the recent sharemarket gyrations and subsequent record number of margin calls made to borrowers to top up their accounts.
Sensible borrowing to invest is a reasonable wealth creation strategy but some products and gearing strategies push things to the extreme. If it sounds too complicated or too good to be true, it probably is.
Suncorp wealth adviser Leanne Wilson says right now you have to outlay a large amount to get into the residential property market, which is out of reach of most middle-income earners.
"We bought a house at Greenslopes in 1988 and sold it in 2000. In these 12 years it doubled in value. Then we purchased a home in the 'burbs in 2000 and sold it in 2005, and in just under five years it had nearly tripled in value," Wilson says. "It kind of gives you an appreciation for the growth in property in the last few years."
She compared the average wage in these periods and the home in Greenslopes cost 2.5 times the average wage for that period.
"When I sold, it was worth three times the average wage. The 'burbs property was sold at 5.5 times the average wage.
"It just goes to show that residential property is becoming an expensive investment for those on average wages."
Financial guru Noel Whittaker says Australian investors love to buy in boom and hate to buy in gloom.
"This is why the sharemarket is down at the moment and why there are for sale signs everywhere," Whittaker says.
"The great benefit of shares is that you can buy and sell in small parcels and you never have the worry of tenants, maintenance, vacancies, rates and land tax.
"Also, you can buy the whole market by using index funds. It is also a fact that the sharemarket having experienced a slump has never failed to eventually make a new high."
Whittaker has long advocated that buying a home to live in is the best way for most people to start, as it provides security of tenure, free rent and an asset that is free from capital gains tax.
It also enables the DIY enthusiasts to turn their spare time into tax-free dollars by renovations and refurbishment.
But right now he says Australia has the highest house prices in the world and yet first-home buyers are rushing into an artificially stimulated lower end of the market, often with no deposit, taking out mortgages when interest rates are at their lowest point for many, many years.
"It is generally accepted that all this stimulus happening around the world will eventually cause inflation and when that happens it is a sure thing that interest rates will rise with it," he says.
"In fact, it is not impossible to imagine that inflation could hit 10 per cent and interest rates 14 per cent. Can you imagine how catastrophic that will be for the housing market?"
But on the positive side, 2000 migrants a week are moving to Queensland and despite promises of the Rudd Government, it is taking longer than ever to get a development from raw land to finished blocks.
Whittaker admits the sharemarket has performed terribly in the past few years but says returns are there for the long-term investor.
For example, if you had invested $1,000 every month since January 2002 until February 2009, your $86,000 investment would now be worth only $82,860, a loss of $3,140.
But if you had invested $1000 every month since January 1995 until February 2009, you'd have invested $170,000 in the stockmarket and your portfolio would be worth $244,572, a gain of $74,572.
You can't buy an investment property in most places for much less than $300,000,
but a person with $300,000 to invest may buy $10,000 worth of shares in 30 separate companies.
And for those who are starting off, an investment of as little as $1000 in a share trust may provide a spread of more than 50 companies in a range of industries.
And anyway, as a share investor you won't be called out of bed in the middle of the night to attend a burglary; you won't have to go to court to evict recalcitrant tenants and your budget won't be shattered with huge bills for land tax, rates or repairs.
So what can we expect in the market?
Dale Gillham, chief analyst at Wealth Within, says everyone wants to know if the stockmarket has floored or hit bottom.
"It is possible but as of today this is still unconfirmed," he says.
He believes the All Ordinaries may well fall away and test the low of early March.
"I believe the move down will last for around one or two weeks before the market rises again to around 4200 points with my preferred target at around 4500 points in May or June.
"My expectation is that we will see the high occur sometime in May which will be followed by the market falling away once again, before it rises to its yearly high around September.
"Despite my outlook over the next few months being positive, we still need to be prepared in case the market does fall away as this is still a real possibility."
So right now the best and safest opportunities in the market are in the top 50 shares. But take extra care with the banking stocks, as Gillham believes their strong run up over the past few weeks is not sustainable and there is a higher probability they will fall away in the next month.
History suggests, however, that Australian shares have outperformed other types of investment over the longer term.
