Investing in property or shares (growth assets) ultimately deliver high returns over the long term. But remember that these assets also carry greater levels of risk relative to investing in cash and bonds (defensive assets). Many of us are faced with this age-old question – “Should I buy property or shares?”
To help us answer this question or at least, attempt to provide some clarity on the issue, let us understand some simple investment basics.
A report released in May 2016 by Russell Investments and the ASX suggested that in the last 10 years leading to Dec, 2015, the Australian share market and residential property market both returned 5.5% and 8% respectively. Remember that these are post GFC data. We’ll see much closer returns 20 years pre GFC – 11.9% Australian shares and 12.1% residential property.
Whether you are investing in property or shares, there are two main ingredients – so to speak - needed to make the investment strategy work. And that is, Compounding and Time. To illustrate this point, let’s use $100k cash invested in both shares and property in the last 5 years at their post GFC respective returns.
For shares – assuming no borrowings – you’ll have a total of $130,697 after 5 years. That is a profit of $30,697. (Year 1 - $105,500, Year 2 - $111,303, Year 3 – $117,425, Year 4 - $123,883, Year 5 - $130,697)
For residential property – assuming no borrowings – you’ll have a total of $146,933 after 5 years, a profit of $46,933. (Year 1 - $108,000, Year 2 - $116,640, Year 3 – $125,971, Year 4 - $136,049, Year 5 - $146,933)
As you can see with both assets, the growth in the previous years continued to grow in the years after that creating an even greater return in the 5-year period. Hence with investing, the longer you’re invested, the greater your benefits of compounding.
Now let’s throw in some leveraging. Generally speaking most lending institutions will allow you to borrow more than half of your cash (80%+) when it comes to residential property compared to just around half (50%) of cash in shares. The reason being the short term risks associated with shares are far greater than that of residential property. Using the same example, you can now purchase a $500k residential property as opposed to a $200k parcel of shares. We know with compounding and time, you’ll most likely have greater returns with property (in this example) even after all costs are deducted.
However, you must understand that gearing presents an enormous amount of risks to any investments and must be done with great knowledge and skill.
So what does all this mean?
Well, we’ve learnt that to be successful in any investment, you need both Compounding and Time. You also need to inject some oomph, in the form of leveraging, to boost your potential returns. However, you must also understand that this strategy carries a greater level of risk.
Thirdly, it is important to consider all asset classes to help spread your risks around; and last but not the least, it is important to speak to a professional Financial Adviser like Wealth Peak Financial Advice to work with you to understand your dreams and aspirations and make recommendations in your best interest.
General Advice Disclaimer
Note: - this article is of a general nature only and does not take into account your objectives, financial situation or needs. Please consult a qualified Financial Adviser, like Wealth Peak Financial Advice, before making any decisions on the basis of this article.