Updated: Jan 13
In the case study to illustrate the power of compounding, we assumed that the rate of return is 10%. Some of you have wondered that the return assumption is not a realistic one.
However, when you look at the historical returns, both Property (10.7%) and Shares (10.9%) have on average, resulted in a similar long-term gains in excess of 10% per annum (refer the chart below).
Property vs Shares debate continues...
As both the asset classes: Direct Property and Equities, are designed to build long-term wealth, there has been a hot debate for quite some time that which asset class is superior.
Let's compare the two.
1. Simple to invest
Investing in stocks is simple. You can easily research, select and invest in a wide range of stocks that align with your objectives. We recommend leveraging the experts though.
2. Lower capital and cost requirements
You need a much smaller initial investment amount to get into the equities market.
3. Holding is liquid
You can sell the shares you want, when you want, without having to wait for long periods.
4. Easy access
To buy shares in any listed company you simply need an online account and can trade from as little as $15 per trade.
5. The ability to diversify
The stock market offers you the ability to diversify across sectors such as mining, health and even property through a real estate investment trust (REIT) with ease.
Direct Property (Real Estate)
1. It is a reasonably simple asset class
It is a quite straightforward asset class to understand as it is very tangible. Many people who are attracted to this asset class will not necessarily be sophisticated investors.
2. Serves diversification
It serves diversification as an asset class, as most Australians already have exposure to the share market via their superannuation funds.
3. Offers an opportunity to add value
You can choose to add value by undertaking cosmetic or structural improvements and manufacture growth.
4. Hard to manipulate
It is more difficult for others to orchestrate the property market than it is to manoeuvre the share market.
5. More sensible to leverage
With a typical Loan to Value Ratio of 80%, all you need is a 20% deposit (and other expenses) to own 100% of the property. True that one can leverage share portfolio as well using instruments like CFDs. However, in a down market, margin calls on leveraged share portfolios are not uncommon. Thus, leverage with housing is a lot higher and less risky than with shares.
In conclusion, there's no right or wrong investment class. Each investment brings with it unique risks, along with advantages and disadvantages. A diversified investment plan should have exposure to both asset classes.
Also, it poses the question, which you can personally appreciate?
Next steps: Should you want to learn how the author built his $5m balanced portfolio in 7 years, and aspire to own something similar, feel free to get in touch via email at firstname.lastname@example.org or book an appointment here.
Disclaimer: This article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where applicable, seek professional advice from a financial adviser.