In times of boom and bust, it’s hard to have a rational discussion about different assets. Opinions tend to move to the extremes. We hear statements such as, ‘shares are too risky but you can’t lose with property’, or, ‘the property bubble will burst soon’. After all, everyone is entitled to an opinion.
There are undoubtedly shares that are risky and property that will be sold at a loss. But before putting your money into any type of investment, always take the time to stop and revisit the fundamentals of each asset class.
Perceptions of risk
We all worry about making a loss on our investments. Share prices are publicised daily and volatility makes investors jittery. It is sometimes hard to avoid the temptation to sell.
On the other hand, house prices are not visible and you only know the value when you put your house up for sale. Because you can’t see the value of a property every day, it doesn’t feel so risky. However, the high entry and exit costs, lack of liquidity and the costs of maintaining the asset make property risky in a different way. Investors in property are more likely to see themselves as long-term investors because of this different perception of risk.
The yield on property will fall if rents are unable to rise with capital values. Conversely, as share prices fall the dividend yields on shares will rise. In recent years, net yield on property (after rates, insurance and maintenance) has been as low as 2% pa, whilst the yield on some shares exceeded 9% pa, and also has the tax benefits of imputation.
Supply and demand
Capital values in the shorter term are ultimately driven by how many people buy and sell. Being an astute investor means you must pick where the future demand will be and not just jump onto the bandwagon when it is already rolling. Technology shares in the late 1990s and the oversupply of inner city apartments are good examples.
A key to successful investing is to buy cheaply. One way to assess a price is the Price/Earnings ratio. This shows how many years of earnings from an investment will be needed to buy the asset.
Property and shares will have a place in many portfolios, but it’s all about getting the right balance for you. Always talk to a professional adviser instead of listening to would-be expert opinions.