The Age Old Argument – Property VS Shares

Well if ever there was a TIME to revisit the same age old argument of Property versus Shares then since this time a year ago – this is a TIME to do that.

In respect of what effects Growth Assets (Property and Shares) we have had:

Inflation somewhat out of control – worldwide.

Residential property values generally dropping in light of rising loan interest rates as well as an out of the normal (well above long-term averages) capital growth spurt in the last few years.

Shares (and hence superannuation funds/superannuation pension funds/ordinary taxed investments that have some exposure to these growth investments) experiencing some severe volatility especially shares in the Tech space.

Questions such as:

The typical 60/40 type portfolio (being 60% Growth Assets and 40% Defensive Assets) portfolio is DEAD as a strategy?

Will the technology companies share prices come back after huge growth in previous years then a substantial drop in values (some over a 60% drop) in 2022.

Property – new purchases – how long to wait before the down turn settles?

are regular questions being canvassed.

All good questions. WE ARE NOT IN THE PREDICTING BUSINESS.

What do I run to? Firstly, just don’t run.

Well let us firstly go back over the pros and cons of property versus shares.

RESIDENTIAL INVESTMENT PROPERTY – The Negatives and Positives

Requires a large investment to start.
Probably need to borrow to start.
Can have difficult tenants.
It’s yours, you can to do what you want to your property – paint the door pink or the roof purple for example.
You cannot get little bits of capital out of the investment. It is all or nothing – you cannot just sell the laundry.
Can get called out (as the landlord) in the middle of the night to fix for example the hot water system.
You are invested in one street in Australia – don’t have access to the wealth of the world.
Cannot do in superannuation or pensions unless setup a SMSF.
Can get some taxation benefits of gearing.
High entry and exit costs
If handy can renovate and hopefully get more capital gain from your “own” work when selling.
Ongoing expenses including maintenance/insurance/agent costs.
When the asset is held for more than 12 months then Capital Gains taxed at a maximum tax rate of 23.50%. For most people considerably less, depending on circumstances.

SHARE BASED INVESTMENTS – The Negatives and Positives

Can start with as little as $1,000.
Can get exposure to the wealth of the world.
Low entry costs.
Low exit costs.
Loss of control – must rely on management of various companies being competent/efficient/ethical etc.
Very liquid – monies generally available within a few days.
More volatile than investment property.
Profits of companies (and hence share prices) subject to a lot of factors around the world – lack of control by yourself.
Ongoing fees – minimal
Can get access to various investment themes/regions – e.g. financials/tech companies/Asia/Gold/US shares etc.
Partial withdrawals of any magnitude.
Companies can go broke.
Can do for superannuation funds/pension funds or just ordinary investments.
When asset held for more than 12 months then capital gains taxed at a maximum tax rate of 23.50%. For most people considerably less depending on circumstances.

Moreover, how have they performed? Well for the 10 years ending 30 June 2022 for every $1,000 invested on 30 June 2012 to 30 June 2022 then the $1,000 would have grown to:

Australian Shares – ASX200 Index – $2,444 (income and growth) being 9.35% compound rate of return per annum over the 10 years.

Residential Investment Property Index (All Australia Residential Property) – $1,755 (Growth only) being 5.79% compound rate of return per annum over the 10 years. Add to this rental return on average of 5% per annum less general expenses of say 1% being gross rental return. So total return of approximately 9.79% per annum (5.79% plus 4%).

The rental return will of course depend on how the property is funded (geared – negative, neutral or positive).

Thus 9% to 10% per annum total return on average, from either Australian shares broad market or residential investment property across Australia which is consistent with long term returns for other various periods.

In all likelihood for a lot of us (especially the wealth creators) then having a range of various types of investments is a good strategy. The prospect of good capital growth is a key as is the importance of liquidity depending on your stage of life and perhaps the need to draw down on your investments.

Ultimately the decision will come down to personal preference, with the need to keep in mind the main points of diversity and liquidity in investments.

At Plus1 we are available at any time to discuss issues of this nature with due regard to your investments or financial planning generally.