Property versus shares
Published in the Warrnambool Standard, May 2014 by David Potts
Don't know a share price from a bond yield? Perplexed by p/e ratios? David Potts explains all.
You didn't need the budget to tell you that you are on your own, although a reminder every now and then never goes astray. To get ahead, you must invest, especially while interest rates are low, where they are destined to remain for some time.
An online saving account is not going to hack it. The return is low, it is taxed and it is eroded by inflation.
Where and how should you invest?
The cardinal rule is know thyself. If the
thought of shares jumping up and down
willy-nilly worries you, consider property.
If you dont
want to tie your money up
in something that is always requiring
attention or repairs, then the sharemarket might be a better fit.
Oh, and if you want to borrow, the interest component of your repayments is tax deductible whether you buy shares or property.
And dont negatively gear. Paying out more than you earn in rent is for fools. It is a losing strategy that will bring you undone more quickly than it will the Tax Office.
Registering with a broker - CommSec is the most popular by a country mile - is easier than opening a bank account.
It will only take a few minutes and you can buy shares straight away.
However, dont rush it. The best way for beginners to get used to the sharemarket is to do some pretend or paper trading for a few months. The ASX also has an online simulated share game that teaches you about the market.
Brokerage is payable on buying and selling and is based on the value of the trade. It costs as little as $11 a trade at CMC Markets, the cheapest broker.
One of the biggest beginners mistakes is in thinking a 50c stock is better value than a $50 one, says Dale Gillham, chief investment analyst at Wealth Within, which runs the only accredited diploma in share trading.
They believe they get more shares and, as such, are more likely to get a better return, which is simply untrue, he says.
Another is not having a selling price in mind when you buy. If nothing else, this concentrates the mind wonderfully, because it will force you to put a value on the stock, which in turn will mean doing some homework.
Your exit price is more critical than the buying price, Gillham says.
So where do you start? Go for any of the stocks in the top 20. They will be blue chip and have stood the test of time.
Anybody can throw a dart and pick shares, but managing risk is the most important aspect of investing,Gillham says. Preserving your capital and your profits from downturns in the market is critical to long-term success. If you don't lose on a stock, then you don't have to find a way to make up for it.
Top blue chips are less volatile and always fare better, which is not to say they are immune from any market bad hair day.
However, there are other ways to get into the sharemarket without having to pore over annual reports yourself. One shortcut is a managed fund, usually bought through a financial adviser, where it is all done for you.
Since it does not trade on the ASX, you will not know how it is faring day to day unless you specifically ask. This might not be such a bad thing.
You can get the same thing in listed investment companies, or LICs, which also manage a share portfolio. You will know what the LIC is worth every second of the day, like any other share, and they are easy to get into and out of.
Their annual fee is also cheaper than a managed funds.
But cheapest of all is an exchange-traded fund (ETF), a sort of cross between the two. LICs and managed funds are actively managed, whereas an ETF follows a predetermined index such as the ASXtop 20.
One other thing is that managed funds and ETFs are always valued at what their portfolios are worth, but LICs can stray, and do most of the time, from their real value.
Sometimes that is an advantage - you can buy them for less than their portfolios are worth - but at the moment many are trading at a premium to their underlying value.
Speaking of which, are shares reasonably priced at the moment? Only just, going by the price-to-earnings (p/ e) ratio. The markets p/ e is about 15, which means shares trade on 15 times companies earnings for the financial year. That is right on its long-term average. Over time, you can expect the market to average a 10 per cent-a-year return including dividends. Average is the operative word: it is hardly ever that in any particular year.
And here is a sobering thought. A 50 per cent drop in price requires a 100 per cent increase just to get back to where you were.
With rates so low, property has never had it so good. Perhaps too good, because by any stretch its expensive.
The average rental yield is 4.7 per cent, the equivalent of the sharemarkets p/e or payback period of 21 years.
Even for owner occupiers, mortgage repayments are approaching the highest proportion of income ever, according to the Reserve Bank.
Then again, the unique thing about property is that every home is its own separate market.
But there are some things a good investment property needs. It should match the demographic of the area. In the inner city or close to a university, for example, a unit will be more in demand from tenants than a house.
And you want to buy in an area with a rapidly rising population.
The more sought-after units are close to transport, shops and parks or beaches.
For houses, you could add proximity to a high-rating school.
Look beyond your own backyard. The ideal investment property might not be in your street, city or even state.
It will be where there is a population growing faster than the national average, a median household income growing faster than inflation, strong infrastructure plans designed to provide extended and appropriate services to the growing population [such as transport, schools, roads and shopping precincts] and a local government with progressive town plans and money to commit to the area, property expert and author Margaret Lomas says.
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