If you are embarking on a life as an avid investor, perhaps the million dollar question is whether to invest in the stock market or put your money in property.
In Australia, if you take out superannuation, the stock market and the property market remain two of the best ways of accumulating wealth. However, picking the best option for you between these two can pose a bit of a dilemma. Both of these asset classes have the potential to give you great capital returns as well as income but the best vehicle for you will depend on your investment approach.
Should You Invest in Property?
There has been a steady Australian property boom over the past decade thanks to the low interest rate regime. Over the next decades, the money put into property and shares will be roughly equal. While many Australian investors have a love affair with property, it is the shares that are currently returning the best yields and provide thousands of Australians with a reliable income. The stock market has generated an average annual rate of return of 10.8% over the past 30 years so it still remains a massively attractive investment vehicle in the country.
Choosing the right investment option, whether property or shares, boils down to your investor timeframe as well as your insight into the risks and advantages that each of these asset classes carries. It is generally best if you play to your strengths.
There are plenty of metrics to look at for the best insight into what would you suit your investment goals and ambitions. You have to factor in your budget for example. While the stock market generally has a low barrier to entry, property requires some serious cash. You should also factor in your lifestyle, the tax implications of each investment option, personal values and preferences along with the income.
Advantages of Property Investments
You have the flexibility to carry out renovations on the property.
It is a fairly stable investment that will give you a complete peace of mind.
It provides good cushion for your assets against future inflation although it generally has little correlation to other asset classes such as shares.
Property provides leverage risk enabling you to borrow more money. In a low interest regime, this can be a huge financial advantage when you need some liquidity.
Property can provide you with some negative gearing benefits.
Disadvantages of Property Investments
The biggest disadvantage with property investments is the lack of liquidity. Once you make a commitment to purchase property, you simply have to go the whole hog.
There is poor diversification when it comes to property investment as opposed to the stock market. All your investments will be concentrated on one asset.
While property can provide risk leverage, the leverage could magnify your risk. You may also have to grapple with higher repayments in case there is an increase in interest rates.
Transaction costs for buying and selling properties are generally quite high and will eat into your margins.
Advantages of Shares
Low barrier to entry. There are numerous companies involved in share trading so you can easily gain exposure and begin playing the market.
Shares do not have any leverage so it is impossible to lose more than the amount that you have invested.
Shares are generally immune to interest rates so you don’t have worry about your margins being sheared off by macroeconomic factors.
The transaction fees and costs for share trading are generally quite low allowing you to keep most of your margins.
Once you make the initial investment, there is little to do in ongoing management. It is a fairly hands off kind of investment.
Disadvantages of Share Trading
You have to pay capital gain tax when you sell the shares which eats into your margins or earnings.
There is no leverage. That limits your ability to pull off bigger investments.
Stock markets can be quite volatile, especially over the short term.
Ultimately, the kind of asset class that you will pick will depend on your personal investment goals and perspective but both have the potential to give you excellent returns over the long term.