22 Apr Great Rivalries
The AFL season has started again and the traditional rivals are back at it. Collingwood versus Carlton, Hawthorn against Geelong, Adelaide eying off Port Adelaide and of course West Coast opposing Fremantle.
Another great rivalry that has occupied the hearts and minds of investors is Shares versus Property. Just as in football, there is no shortage of one-eyed supporters – but we will try to give a dispassionate view by measuring them up across Key Performance Indicators (KPIs as they say in footy!)
Which of these two great builders of wealth comes out on top?
A reliable back six players lay the foundation of every good football team. When investing, you want stable income that will hold up regardless of market conditions. Both rental and dividend income are reliable players you want on your side. Dividends have the advantage of carrying tax credits which reduces the final tax which an investor has to pay. Currently, the sharemarket is providing an income yield of 5.77%[i] as compared to residential property of 4.2%[ii].
2. Goals Kicked
Kicking more goals than the opposition wins games and when investing, capital growth is the key. It is easy to be misled here because returns will vary enormously depending on the period selected. You don’t become a great goal kicker just because you had a great quarter. For the 10 years to 31 December 2011, the total return for residential property was 8% per annum and Australian shares was 6.1% per annum[iii]. Having said that, shares have increased by 20% from December 2011 to present day.
Nothing ignites the fans more than seeing one of your players jump onto the shoulders of the opposition and take a big grab! Similarly, you can soar to greater heights when using borrowings to increase your investments. Although borrowing can work well for both shares and property, banks prefer to lend money against bricks and mortar. They also get more nervous when the sharemarket falls (see margin calls) as compared to corrections in the property market.
We all hate seeing our defenders make a high risk kick, only to see the opposition pick it off and kick an easy goal. Managing risk is just as important when investing your hard earned cash. The GFC showed that the sharemarket can be very volatile over an extended period of time. Much like Richmond. While residential property also took a hit (and has fallen substantially at other times like the early 90s), it paled in comparison with the sharemarket. To be fair though, it is not a level playing field because shares are quoted daily (even by the minute) as compared to property which is only really valued when you sell. Kind of like watching the score during a live game versus reading the results in the paper the next day.
In football, it is important to release the ball to a team-mate before being tackled. Similarly, you may need or want to sell your investments and look for other opportunities. Shares can be sold immediately and you can have the cash in the bank three days later. Property can take 3 months or more to sell, while full settlement can still be months after that. You can also sell a parcel of shares if you need to. It’s a little trickier to sell a spare bedroom if you need the money in a hurry. No contest on this one.
Over the course of the season, the best teams tend to lose very few players to injuries. Costs can also reduce your investment returns. Property tends to have very high purchase costs (up to 5% including stamp duty) whilst share purchase costs are unlikely to exceed 1%. Both can have ongoing management costs. For example, agents fees and repairs for property and management costs for shares. Overall though, the costs of share ownership are definitely lower.
So who wins?
Supporting a football team and investing are both emotional pastimes. Across the KPIs listed above, shares win 3 points to 2. I must also disclose my personal bias – I am a one-eyed Collingwood supporter and in my heart, I definitely prefer shares over residential property. But I’ve learned to live with Carlton supporters as well. Unlike football, it is also possible to support both teams. Whether it is shares or property (or both) the important thing is to take action and get in the game..
What do you think?
[ii]Source: RPData. Rental yields for houses in capital cities before costs, as at January 2013
[iii]Source: Russell Long- Term Investing Report June 2012.
About Reuben Zelwer
Reuben Zelwer established Adapt Wealth Management in 2011 to help time poor clients achieve financial freedom. For over 15 years, Reuben has helped professionals, executives, business owner and those approaching retirement make the most of their circumstances by making good financial decisions. Reuben’s professional practice is complemented by substantial voluntary work, which has included setting up financial literacy and savings programs in the local community.