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 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 like arguing which golf club is best. Each club has its unique purpose, and the reality is that golfers need many clubs in their bag 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 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.
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 that 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 between -30% and 53% (plus or minus two standard deviations). That is a very wide range, right? And that is why shares are seen as volatile, as 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.
This can be a very effective strategy as explained in
this video by
Vanguard (watch from 1:30min). This example shows that if you invested $500 per month in an Australian index fund beginning in 1990, that by June 2020 your investment would be worth $760,000. This balance comprises of $177,000 of your contributions plus $583,000 of investm
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IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
