Investing in the share market vs. the property market

There will always be varying opinions and some level of self-interest involved when it comes to the debate of shares vs. property investments.

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As an investment adviser and financial adviser, I’ll try and be completely unbiased in this article and simply compare some basic pros and cons of investing in either asset class.

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I’ll address the benefits and challenges with each investment asset class. I’ll also outline historical investment performances and share which asset class has performed the strongest over time.

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One of the most important things for us at Emanuel Whybourne is asset allocation – meaning how do we guide our clients about how much they should own in the share market vs. real estate market?

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My experience in investment property strategies:

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Firstly, I might tell you a personal story…

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In my 35-year career investing in both share markets and property markets, I’ve personally bought and sold 15 properties in my lifetime.

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The very first property I purchased was a beautiful two-bed, two-bath apartment with point-blank views of Sydney Harbour that also overlooked a beautiful park in Kirribilli, Sydney.

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I bought that property investment in 1998 for the pricely sum of $230,000 back when property prices were clearly far lower.

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From the date of ownership right through to the holding period, I never once stepped foot in the front door. This meant that at all times, I was completely unemotionally attached.

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I then decided to sell the property seven years later, because the property value had doubled. My view was that I had totally cleaned up with the profits and I was happy with that at the time.

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However, had I continued to hold that property for the following two decades, I’d probably estimate the property would be worth in excess of $2 million – if not even more.

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My experience in share market investment:

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Now let’s compare this increase in property value to the share market. We can look at both Australian and international share markets and see similarities.

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For example, Commonwealth Bank shares floated in the market in 1994 for the price of $5.40. Today, CBA is trading at around $100.

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Had you held Commonwealth Bank shares for the last 25 years, you would have returned more than 20x your investment (plus dividends) over that period of time.

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The dividends paid on Commonwealth Bank shares are now more than twice your original price to buy that share. So, in real terms, your return on Commonwealth Bank shares is now 200% per annum on your original cost.

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Let’s look at a couple of other great shares:

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• Amazon: If you had held Amazon stocks over the last 20-year period, you would have enjoyed a return of about 14,000%.
• Tesla: Tesla has jumped more than 20x (or 2,000%) in value in the last four-year period.

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I’m not saying that every single share you invest turns to gold like these ones. In a lot of cases, a lot of listed companies can go under.

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The secret to successful share market investing is to make sure you’re diversified at all times, detach the emotional risk and never carry too much concentrated risk in one company or one sector.

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The Pros and Cons of Investing in Property or Shares

Share Market

Property Market

Liquidity

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Very liquid compared to the real estate market which means you can buy and sell your investment anytime you want as opposed to property investment.

However, this liquidity can create a lot of panic by investors when viewed as a short-term investment.

Less liquidity – cannot buy and sell as quickly or efficiently as you can with shares.

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Cost

The costs of investing in the share market are significantly less than the property market.

Stamp duty was abolished on share market investing in Australia about 20 years ago.

Higher investment costs and higher entry-level costs.

Stamp duty still exists for property purchases.

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Taxes

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Investing in the share market is also cheaper from a tax perspective.

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Investing in property requires considering additional tax costs such as holding costs, strata fees, council levies and land tax

A large benefit of investing in property is that banks are comfortable in taking security and lending a higher value on asset. It’s tangible and not valued at market as frequently.

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Most importantly, the property market is viewed as the more stable asset class because the holding period is so much longer for property compared to shares. However, I would argue that this is an unfair perspective when comparing the two investment strategies.

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The average holding period for an investment property in Australia is around 11.5 years, this holding period becoming longer over the past decade. While the average holding period for a share market investment (retail) continues to become lower over time. The average retail investor holds their shareholding only 5.5 months, while a high-frequency hedge fund less than 11 seconds. (Source: Realestate.com.au, Reuters.com; coronavirus short termism).

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What has performed better historically: Shares or Property Investment?

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There are reams of data when you do research on which has been the best performing asset class over time.

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In this article, I’m only going to discuss shares vs property.

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Other assets we won’t discuss about include assets such as private equity, venture capital, fixed interest, investments, credit, and most importantly, riskless assets (the bond market).

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But for now, I’ll only touch on the two core growth assets that clients can invest in: the share market and the property market.

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Investment Property Returns:

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Over the last 30-year period, investment properties have on average performed at around a 5.5% growth per annum (excluding rental income). If you include rental income, the total return in holding residential property over a 30-year period has been in the order of around 9% per annum. (Source: ABS)

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However though, this data does not include taxes such as land tax, strata fees, or ongoing maintenance costs. Most importantly, this performance data can never be adjusted for the significant amount of money spent on a property portfolio for capital improvements or renovations. Estimates for this kind of property maintenance/improvements can be anywhere from 5-6% per annum, at a national level according to the REI.

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Share Market Returns:

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Over the same 30-year period, the Australian stock market (the ASX 200), has had an average return of approximately 11.7% per annum.

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The global share market has been even stronger. Referring to the MSCI over a 30-year period, the global share market has returned the order of 13.7% per annum.

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However, in comparing these returns, investors then need to account for the real inflation-adjusted return and deduct inflation off each of those annual performance numbers, to allow for the real value of these assets over time.

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The international share market continually outperforms the Australian property market by more than double every year.

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This is because the international share market is arguably the most frightening and scary investment to be in.

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In a ten-year period, for around 3/10 years, you will see a fall in investment returns. However, it is the 7/10 years in that period that provide the big outperformance.

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Deciding on Your Investment Strategy

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When it comes time to talk to clients about how much of their money they should invest in each asset class, there is really no black and white answer. It really depends on a number of personal issues to be considered. You also need to look at the acquisition dates for properties, the cost bases and the tax consequences.

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What we can say with honesty to all our clients is that it is incredibly important that they have a broad exposure across all different asset classes.

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What we at Emanuel Whybourne can also say with conviction is there is a common correlation between how regularly a client should look at their investment strategy.

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The fact is the more a client looks at their investment portfolio, the less profit they make over time. Why? Because investors naturally feel incentivised or the need to do something within their portfolio, ignoring the additional costs such as transaction charges and tax consequences.

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We say to clients to view their share portfolio (or their investment portfolio) in the same light as a long-term property portfolio.

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You would not buy an investment property and look to sell it shortly after you bought it. It is irrational to hold an auction in your front yard every week or every month, to see what your property value has done. Investors should have the same view with their share portfolio.

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We always focus on long term-ism. Diversification is key. Do your research and invest your money in a great investment manager who focuses on risk mitigation.

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Each of the investment classes or choices across the share market vs the property market can carry different pros and cons.

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The fact is that the passage of time will be kind to all assets.

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The most important thing we can educate our clients on is:

• to not be distracted by short-termism,
• to avoid exaggerated media noise, and;
• to avoid listening to friends about what they should be doing with assets in the short term and instead, seek professional advice that aligns with your values and goals.

Emanuel Whybourne is here to help.

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Our door is always open for those looking for investment advice or guidance.

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Where Emanuel Whybourne can add the most value to our clients is by hand-selecting those who we believe are the world’s top 20 performing investment managers.

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We then partner directly with them to ensure that all of our client’s portfolios at all times are diverse across all asset classes.

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If you have any queries about your current asset allocation or how we can help you change your investment portfolio for long-term success, our door is always open.

Until next time,

Craig

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