Property vs Shares: The Definitive Guide
By Dale Gillham | Last Updated 02 September 2020
Property versus shares – it has been a hot debate for quite some time particularly as these assets are designed to build long-term wealth. So which is the better investment vehicle and why do we get conflicting answers in this debate?
The property versus shares debate
Depending on who you listen to, you will often find that one investment is favoured over the other. Indeed, the persistent debate comparing the returns on shares with the returns on property tends to vary depending on market conditions and the writers bias.
As a share trader and an accredited educator in share trading, I could write this article in favour of shares. However, I am also a property investor and I believe that any intelligent investor needs to be in both markets.
The truth of the matter is that it is very hard to compare these two markets simply because we are not comparing apples with apples. There are many different variables to consider when investing in either market; for example, leveraging, taxation, interest rates, risk and holding costs to name a few.
Then we need to consider what aspects of these markets we compare to provide a fair and unbiased analysis. Do we compare the All Ordinaries Index with the Melbourne property market, the Victorian property market or the Australian property market? And should we compare capital growth or capital growth and income?
The combinations are endless and as evidenced in many other articles written on this topic, it is possible to deliver any outcome depending on your bias and make it look like we have settled the dispute once and for all.
Buying property versus shares
There are those who claim that you would be better off buying an investment property rather than shares as the asset is tangible and potentially represents less risk. However, what I want to propose is that you can benefit tenfold by investing directly in shares and property.
For most people, investing in property is a long-term buy and hold strategy where “time in the market” yields good results. When you buy an investment property, it will remain relatively unchanged as an investment for decades with the exception of general maintenance.
Shares, on the other hand, should never be treated as a long-term investment, rather they are a short to medium-term investment vehicle where “timing’ the market” is far more important than time in the market. In fact, when it comes to shares, timing the market is everything simply because it is about buying low and selling high, which is where individuals have a huge advantage over fund managers, as I show you later in this article.
In my opinion, both investments vehicles are essential for accumulating wealth, as each assists you to invest in the other, given that when you invest in shares using my four golden rules, it provides the cash flow to invest in property and property provides you with leveraging opportunities to trade shares. So let's know investigate the return on property and shares over the past 10 and 20 years.
Investing in property and shares
Based on the Russell/ASX Long-Term Investing Report for 2018, the 10-year after tax return (including costs) at the highest marginal tax rate to 31 December 2017 for Australian shares was only 2.6 per cent compared to property, which was 5.1 per cent. In comparison, the 20-year after tax return at the highest marginal tax rate (including costs) to 31 December 2017 for Australian shares was 6.7 per cent compared to property, which was 7.6 per cent.
So in both of the cases above, property has outperformed shares.
However, both scenarios do not take into account leveraging (or gearing) that is normally associated with a property investment. Therefore, if we were to compare these shares and property based on gearing of 50 per cent to 31 December 2017, then at the top marginal tax rate, property still fared significantly better than shares. This is because the Australian market has performed poorly over the past decade, as it is yet to trade above its previous all-time high in 2007.
Source: 2018 Russell Investments/ASX Long Term Investing Report
But if we compare the 20 year return to 31 December 2017, the difference between the after tax return at the top marginal tax rate for property and shares is only marginal at 0.9 per cent.
Source: 2018 Russell Investments/ASX Long Term Investing Report
As these examples demonstrate, buying an investment property over the long term will yield high returns if you buy in good capital growth areas. For example, houses in Melbourne have risen historically at an annual growth rate of 8.1 per cent over the last 25 years, according to Corelogic data presented by Aussie Home Loans, while at a national level it has grown by 6.8 per cent.
Source: Aussie Home Loans
Buying and selling property over the short term, however, has generally yielded very little results due to the high transaction costs and long periods of low growth. Indeed, it is well known that property generally has strong growth for two to three years within a ten-year period, and then only increases marginally better than inflation during the other seven years.
Having now read this, some would argue that this supports the perennial debate that property is the better asset to invest in. But what if you could achieve returns in the stock market that are equal to or better than the returns you achieve from investing in property on a consistent basis and so compound your returns substantially?
Why buying and holding shares over the long-term is not a good strategy
The reason why most of us hear the words “buy and hold” or it is time in the share market that yields returns is because the institutional funds cannot time the market, they are just too big to manoeuvre with any speed.
Anyone who has dealt with a financial adviser when it comes to investing in the stock market would be familiar with the adage that you need to hold onto a portfolio for 10 years or more to yield an adequate return.
In essence, this allows the investor to experience a rising market for 30 to 50 per cent of the time to compensate for the years that the market is moving sideways or down. If you don’t believe me, just look at the returns on institutional funds over the past 10 years - at least 80 per cent have under performed.
Therefore, to accept that time in the market is more important than timing the market is probably the greatest down fall of anyone wanting to beat the market average.
The reality is that using a “buy and hold” strategy will see gains during bullish periods in the stock market decimated when the bears take control in a bearish market, as we saw occur during the Global Financial Crisis (GFC) and other previous major market declines. In contrast, with a little bit of knowledge, a more active approach will allow you to participate during the bullish run and sit on the sidelines when the market trades sideways or down.
Why you should invest directly and actively manage your portfolio
As many who actively trade the share market know, timing the market is everything, as it alleviates the problems associated with having your capital tied up for years in unproductive investments that is present with a buy and hold strategy.
Unlike fund managers, who must invest your capital when they receive it irrespective of whether the market is rising or falling, you have the flexibility to diversify the timing of your entry and exit to ensure you only invest when the market is rising.
And the good news is you can do this using a low risk, methodical approach that ensures you maximize your profits while minimizing your risk.
In my latest award winning book, Accelerate Your Wealth – It’s Your Money, Your Choice, I demonstrate how you can achieve returns that not only outperform the institutional funds by a significant margin but also rival or outperform the returns you achieve from investing in property. And you can do this in as little as a few hours a month once you establish your portfolio.
In my book, I actively traded a portfolio of the top 20 stocks on the ASX over 10 years from 2 January 2007 to take into account the effect of the GFC and the market volatility that followed. The gain achieved from capital growth and dividends during the period to 31 December 2016 was 225.82 per cent or an average annual return of 22.58 per cent, which you would have to say is pretty impressive. This equates to an annual compounded rate of return of 12.54 per cent. Obviously the real return will be lower after factoring in capital gains tax and inflation.
But that aside, what I demonstrate is that it is possible for individuals to achieve very rewarding returns without taking high risks or speculating. And it may surprise you to learn that I achieved this outcome using a ruler and pencil to apply trend lines in combination with a stop loss to protect capital. In comparison, the return on managed funds, as published by Canstar Research, over the same ten-year period represented only 4.67 per cent.
So not only can you achieve very profitable returns but you also have the potential to outperform the institutional funds and the returns on property using some simply do-it-yourself stock market investment strategies. It is for this reason why I advocate that you should always invest directly in both shares and property, as you have the ability to compound your returns substantially.
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