The Impossible Question – why it’s so hard for investors to decide between shares or property

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The Impossible Question – why it’s so hard for investors to decide between shares or property

For an investor trying to build wealth and achieve financial independence, a question they will inevitably face is whether they should be sending their savings into stock market investments, or paying off an investment property instead.

In my experience, most people decide which fork in the road to take based more on comfort and personal preference than hard facts. Nevertheless, it’s not infrequent that I get a question from a genuinely unbiased investor as to which way they should go.

The truth is an accurate comparison of these two investment options is not possible. Each, however does have its pros and cons, and it’s through an evaluation of these that investors can find the path that’s right for them.

Comparing shares and property as investment possibilities is impossible because when investing in property you are purchasing a single asset that will likely have a single tenant. The equivalent with shares would be buying a single company share, but in practice that’s not what people do. Quite wisely.

When we invest in shares we invest in a portfolio, a mix of different businesses. This diversification means that the share investment holds considerably less risk than the highly focused property investment. Now when I say risk, your mind will probably automatically perceive this as a negative. And whilst that is not unreasonable, a better way to think of risk is with respect to a range of potential outcomes. For a single property, the potential upside could be significant. Gentrification of a suburb, rezoning, or as we saw until recently, unusually low interest rates inflating prices, could mean big rewards. But on the flip side a property investor might get terrible tenants, the property itself might turn out to be termite infested, or the local Hells Angels club moves in next door. So when it comes to investing in a single property the range of outcomes, both good and bad, is very broad. This therefore means it is a high risk investment.

Add on top of this the fact that you’ll almost certainly have borrowed to undertake this investment.

Borrowing, which we commonly refer to as gearing, magnifies an outcome. When things go well gearing magnifies positively, but when things go badly, gearing makes things considerably worse.

Gearing also increases the likelihood of a bad outcome due to the interest costs on the debt.

For someone investing in shares, they’ll typically use funds that have hundreds or even thousands of different companies within them. Some of the companies within those funds will experience fantastic growth, but there will also inevitably be some losers. It is the offsetting of the winners and losers that reduces the range of potential outcomes in a share portfolio, thus making this a lower risk investment relative to the single property. Indeed, with a share fund, at least one that follows a mainstream index, we can often look at very long term data to get a fairly accurate sense of the likely average return over a period of 10 years or more. Whilst there are some similar sources of data for property, because you are not buying a portfolio of properties, the data’s applicability to your particular circumstance is negligible.

Instead of trying to focus on which investment will give you the better outcome, a better approach is to determine which option suits your circumstances the best.

Property investment has a couple of key attraction. If you’re a tradie or someone who’s handy generally, property holds the potential for you to add value through your own sweat. Additionally, property is easy to gear. As touched on earlier, gearing increases risk, so for someone looking for a high risk, and hopefully high reward investment option, property may be the best fit.

Any investment strategy involving gearing is likely to suit someone with highly dependable income, providing them with the confidence that loan repayments can be met even if the property were to be untenanted.

Stock market investments, however, might suit someone where there’s a little more uncertainty about their ongoing savings capacity, or perhaps just their future plans. By not needing to borrow, a wealth creation strategy built upon monthly stock market investments provides a high level of flexibility. The regular monthly additions could be changed or paused at any time, and if things really got challenging some or all of the share portfolio could be sold down at negligible cost, with the cash back in your bank account in a matter of days.

Shares versus property is the age-old investment question. It’s not even an apples versus oranges comparison. It’s an apple versus orchard comparison.

That’s what makes it the impossible question.

You need to find the strategy that works for you. Maybe that’s shares, maybe that’s property, or perhaps it’s both. Property or share investment need not be a binary choice. There are plenty of investors who have both.

I can share that it’s far more common to come across people who started with property investment and then developed a preference for shares due to their hands off nature, than it is to find share investors who become property converts, though I’m sure such people exist.

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