People’s investing preferences depend on their financial circumstances, their financial literacy, and their relative familiarity with the different investing options. It’s not a simple “shares vs property” conversation with a clear winner and loser.
When it comes to investing in shares and/or property, there are five dominant strategies people tend to follow:
- Shares ONLY
- Property ONLY
- Shares AND THEN property
- Property AND THEN shares
- Shares AND property
This article delves into the details of each.
Before getting into each strategy, though, it’s key to understand the relative advantages of shares vs property - and vice versa.
These advantages and disadvantages ultimately come from the underlying characteristics of shares and property as investment asset classes. When comparing shares vs property, characteristics worth discussing are: long term returns, diversification, liquidity, effort, market efficiency, and leverage accessibility.
It’s also important to distinguish between property as a home, compared to property as an investment. It’s one thing to buy your own home to live in; it’s another to consider property as a means of accumulating wealth.
The factors involved in home ownership for your primary place of residence are more than just investment characteristics. In this article, we won’t cover all of these factors. However, this piece should help you navigate the decision by giving more clarity around investment considerations. That way, you can evaluate the more personal elements yourself.
Shares vs property - how they compare as long term investments
Long term returns
There’s a lot of noise about whether shares or property have “better” returns. In truth, both investment classes have comparable long term returns.
This chart plots returns of Australian property, shares, bonds, and cash over the past 25 years until 30 June 2022. As you can see, shares and property tend to grow at roughly similar long term rates.
This means that if you’re choosing between property and shares, you should make your decision for reasons other than your long term investment expectations for either asset.
Diversification
It’s extremely easy to build a diversified investment portfolio with shares. In fact, you can buy shares in thousands of companies for the same price as a deposit for one house.
To do so, you can buy shares in multiple companies, or invest in a listed fund, like an exchange-traded fund (ETF). The latter choice spreads your investment capital across multiple companies for you.
On the other hand, it’s difficult to diversify residential property investing. You’re almost always going to have an enormous proportion of your wealth in a single asset in one location. This is especially true at the beginning of your investing journey. It’s also virtually impossible to diversify through multiple property types, markets, and countries. As such, if you pick the wrong one or suffer some bad luck, your wealth can take a massive hit.
In addition, if you own your own home, you likely already have much of your wealth in residential property. Purchasing further residential property is going to increase your concentration risk even further.
Leverage access
Inexpensive loans to invest in property are relatively easy to access. By contrast, inexpensive loans to invest in shares are harder to access.
This means it’s typically easier for investors to get higher long term returns, using borrowed money, by investing in property. Depending on your risk profile, this may be a benefit or a drawback.
Market efficiency
The stock market is relatively efficient, so it can prove difficult to beat. As a result, buying the entire market to ensure average market returns is usually the most efficient way to invest.
In comparison, the residential real estate market is inefficient. This means that if you know what you’re doing, you are more likely to do better than the market average. The downside is that if you don't, you may end up performing worse than the market average.
Liquidity
It is extremely easy to buy and sell shares. You can buy and sell shares on any (and every) business day.
Property, however, often requires months of pre-planning. If you need some cash, you can’t just sell a door or a window, so cash flow requirements are a problem. To sell any of it, you need to sell it all.
Time intensiveness
Once you set up your share portfolio and your automated investing strategy, maintaining a diversified share portfolio can take fewer than eight hours per year.
Property portfolios, on the other hand, are much more time intensive. Generally, there’s maintenance, communications, and other requirements.
Summary
Investing strategies - shares and property
When investing to accumulate wealth, people typically have one of five distinct investing strategies. These preferences depend on their financial circumstances, financial literacy, and relative familiarity with the different investing options available to them.
As mentioned earlier, it’s not a simple “shares are better than property” or “property is better than shares” conversation. Rather, it’s a decision that needs to account for many factors. It also often changes over time as people’s circumstances and preferences change.
Below are the five investing strategies, as well as the typical features and goals of people who invest in each.
1. Shares ONLY
Shares-only is when someone has decided to never buy property. Instead, they plan to rent indefinitely and invest the vast majority of their savings into shares. In doing so, they aim to accumulate wealth, save for retirement, and build a passive income stream.
This strategy is most often pursued by people who do not have location-based commitments. This may include (but isn’t limited to) people who don’t have children, work remotely, and like to travel. These people can be referred to as “digital nomads”, and typically value the flexibility of not owning a home. Ideologically, this lends itself to the low-effort, high-diversification and high-market efficiency combo of shares over property.
They have also typically developed a strong financial literacy baseline and understand the trade-offs between shares and property well. They use lifestyle choices to drive their investment decision-making, not familiarity with one asset class over another.
2. Property ONLY
Property-only is when someone has decided to never buy shares and plans to only invest in property.
This is a common wealth accumulation strategy in Australia, and is pursued by a large fraction of the population. People who pursue this strategy do so for multiple reasons.
Some people commit to property-only because they don’t understand or are frightened of shares. Others pursue property because they have skills which enable them to take advantage of the market inefficiencies of residential property.
These people understand the property cycle; economic cycle; the market they’re investing in; have enough information and experience to take into account all of the variables; and are willing to do the additional work required.
3. Shares AND THEN property
A tweak on the strategy above is when people invest in shares to accelerate saving for a first home deposit. With house prices rising sharply over the past three decades, it has become harder for people to buy their first homes. This is especially true in large metro cities such as Sydney and Melbourne.
In response, some people are using shares to save for this first home faster. With the average time taken to save for a home deposit in Sydney and Melbourne now at nine years, many people are looking for ways to accelerate this process. Historically, investing in shares has been likely to fast-track this process.
4. Property AND THEN shares
Alternatively, some people want to prioritise buying a home without exposing their savings to the cycles of the stock market. However, once they’ve bought their home, they then want to accrue long term wealth with relatively low effort, low risk, and high returns. These people often invest in shares to do so.
Additionally, some of the most financially literate people in this subset take advantage of home ownership’s low debt costs. They then use this to invest in shares with cheaper leverage rates than they could have otherwise accessed.
5. Shares AND property
The final strategy is when people invest in both shares and property simultaneously.
It’s now common for some people to dabble in one investment at the same time as the other. However, It’s quite rare for people to fully pursue both investment asset classes simultaneously.
And, to be honest, it’s very rare to find people who do both well. To invest in shares for the long term well requires an acceptance of market efficiency and a passive investing approach. Alternatively, accruing a residential property portfolio typically requires a significant investment of time and a commitment.
Shares vs property - which is right for me?
What we’re about to say may sound like a fence-sitting answer. However, it’s also the most sensible one. To make the right choice for your needs, you need to ask yourself a series of questions.
“Is home ownership or passive income more important to me in the long term?”
“What’s the timeline on which I want to own my own home - if I want to own one at all?”
“What’s my attitude towards debt?”
“How do I feel about risk?”
“Do I want to park my wealth in one asset, or diversify it?”
The more questions you can answer, the more likely you’ll be to choose between the five different strategies. Be honest about your long term hopes and plans, and the strategy will follow.
Happy investing,
Kurt
