Property and Shares

 

Some people describe an investment as a form of energy that is then allocated in the form of money.
This is invested in an asset that we desire, to gain a favourable return from via capital gains, interests, dividends etc.

Then we fall back on a tautology and state a good investment will return more back to you than you invested in the first place.

Which is a sort of given.
I think we should always remember that the creeping effects of inflation must be taken into account as well when we see an increase in an assets value.

My rule of thumb is how much risk, what is the possibility of increased value and how is this compared to hiding my cash in the bank.

From an investors perspective there is basically just two asset classes which are the kings of investing.

Some of the richest empires on earth have been built around these two.

Shares in a business and property are what I was referring too.

You can look upon a simple business structure as a form of
creative energy in action.

And many business, like Ford for instance with their great line of cars, can change the world in many ways.

And we all get the associated economic growth no matter how big or small the companies may be.

There is also a ripple effect of the companies buying and producing goods, as well as the wages they pay their employee`s.

Great businesses are the power houses of the economy.

And property for instance, is a form of creative energy which has phases where many types of skilled workers are being given employment.

Who would have thought 20 years ago there would be successful companies like Airbnb that actually do not own any property but make a hell of a lot of money through property.

Other people`s property that is.

Everyone needs some form of dwelling to live in, and until that changes, then houses will always be in demand.

And there will always be cycles within cycles of supply and demand of course.

So which is “better” in this “struggle” for supremacy ?
Seriously, does there have to be a winner at all ?
Both models can work, in the right situations, but we prefer to deal with property since it is more “tangible”.

We believe a savvy investor should concentrate on property, but always have a combination of shares and property.
The same way we advise our clients to have a mix of negative as well as positive geared properties.

This goes back to the good old principle of diversification which suggests that you should have an exposure to all asset classes because they will perform differently at different points in the economic cycle.

This makes sense logically and has worked for a long time and has made many people wealthy over the years.

We seriously believe if you have the right mix of investments in your portfolio, you should be able to make a positive return in almost all markets, the catch of this is, over time and on average.

When we take a look at the historical performance of all the listed investment classes from Real Estate Investment Trusts (AREIT’s) through to just cash we see that residential property is not on this chart.

Simply because it is not a listed investment that you can buy on the stock exchange today.

When viewed from the businesses / property dynamic, infrastructure could be considered a property like investment.

And do not lose sight of the simple fact that fixed interest and cash are defensive investments and are not expected to provide capital growth.

With investing we need to remove all the conjecture and misinformation and stay focused on the core essence of the topic.

Historically there has been a very tight race between property and shares.
And property has returned a slightly higher gross return for our money at about 9.6% p.a.

But, when you factor in tax, in some cases, Australian shares have been the better performer.

Some investors use shares as are a more tax effective investment because they pay dividends with tax credits attached.

But some people view property as the only road to riches.

And others view investing in shares as a form of gambling.

 

The difficulty of shares for most people is that they feel they do not have the knowledge to invest successfully and many have noticed how frequently share prices, unlike real estate, jump around a fair bit.

Banks are always happier to lend more money to invest in property than shares, which encourages a form of false sense of security.

And see what the banks response is if you desire to borrow money to invest in their own shares.

Yes, asset classes like real estate can expand and crash, look at the Irish experience to see that in action.

But in Australia, due to heavy regulations, we will never see that sort of problem.

All things being equal we will always desire to use borrowed money to invest in property as opposed to shares, because things like margin loans are more expensive (interest rates are higher) and you are subject to margin calls (if your share portfolio drops enough in value, even for one day, you will need to reduce the loan with new cash or sell your shares).

This is not a problem with wise property investments !

The good side of property is.
You can renovate and increase the value of your asset.
And then borrow over time against the value of your home.
You get to administer this form of asset.
The short term fluctuations are not as great as we see in shares.

The advantages of shares are.
Ease of purchase.
Daily valuation.
Can get tax credits for dividends.
And ease of liquidity.
Please don’t forget to look at our rentvesting article.

Or contact us here now

Leave a Reply

Your email address will not be published. Required fields are marked *