Property vs. Shares (again) - but do shares work in reality?

Something has been on my mind for a few days...

I often flip through the Australian Property Investor magazine and they usually have articles featuring people who are doing well with real estate. They are general accounts of the people's investing and their portfolios - in black and white so to speak.

There was a recent discussion on this site asking about property vs. managed funds - a variation of the long standing property vs. shares question/debate.

Got me thinking.

The API magazine documents a steady stream of ordinary people who are building substantial wealth via real estate. However, where is the evidence of people building substantial wealth from shares?

Many large respected institutions can produce reports to demonstrate that shares are superior to real estate. However, at the end of the day, where are the successful share based investors? Some thoughts:

1. They are there but don't have a magazine/forum to be acknowledged.

2. Shares work in theory - but life gets in the way and the theory doesn't work in reality. Things like fear/greed/bad advice/bad selection/corporate collapse.

3. The apparent benefits of shares actually become negatives given human nature and market cycles? Maybe with share investment it's too easy to chop and change - and it ends up working against us? (The apparent chunkiness of real estate forces long term consistent investment and ultimately works for us?) I think I read once that the actual return to the average investor in managed funds is lower than the average managed fund - a subtle difference but important - people chase last year's winner, but it's often not current year's winner.

4. Maybe the real estate investors are not so well off if factor in loans; holding costs; maintenance; buy/sell costs.

I may be totally off track - but wondering what people's thoughts are?

 

Yes I agree that the marketability of real estate has a lot to do with it. Given the huge popularity of real estate, all the home renovation and auction shows, the drama of buying/selling/losing a house.

Share holding is just a boring entry in a database - except perhaps when a huge boom comes along - then you hear of all the exciting 'strategies' Joe Blow used to make millions of dollars in just weeks. Then you will see all the magazine articles and media attention. Otherwise it is like watching paint dry.

 

Both vehicles have their benefits and disadvantages and true investors would use both.

The average long term return of australian shares is about 14%PA, whereas residential property is about 8%PA capital growth and 4% rent, so thats about 12% gross. From this people forget to remove holding expenses, and the large buying and selling expenses. Plus when you hold a few properties, you get slugged with land tax annually.

If you model the same commitment needed into property, into shares, you will probably find with shares your better off due to their longer term higher capital growth and lower holding cost.

The REIx is a strong body interested in protecting the members interests (realestate agents) they often get up into the media and sell spin on how x suburb has increased 40%, booms are happening, etc etc... all geared at pressuring potential buyers at buying property and paying up for it. Hence why they are behind TV shows and glossy mags selling you the idea of property investment.

There are just as many shares magazines as property magazines, so you really cant say this serves as any indicator on what is a better investment.

Shares are as you say 'more boring' as the key is to buy and hold, buy and hold.. no fancy renovations, no 'exciting' Auctions.

If you want to see the company you own, you can look up the address and visit it, just like a house. This 'emotional' factors shouldn't be one to decide what you do.

Property is good for its high leverage, and its a great way to start with a large asset holding value, but once your serviceability becomes a problem, you will have to save up larger deposits (or lower your LVR) to buy more properties, in which case you can buy shares on a margin loan to get the same net result.

There is nothing glamorous holding 20 properties and constantly getting phone calls for maintenance issues, tenants moving, unpaid rent, tribunals etc etc.

Shares are a set and forget investment, just build and reep the rewards. With shares you can also diversify easier, rather than buying 1 large lot in 1 company like 1 investment property. Shares are easier to sell, should you need the money, but as you pointed out, this can work against you should you get a emotional reason to sell, say when the market is falling.

If you do like property, you can invest into funds which hold direct property, without the large transaction charges associated with direct property.

 

Thankyou all for your replies... you're probably right, real estate is more sexy to write about in a magazine.

I personally wouldn't think of a share investment as 'set and forget' - much as I'd like to I have both property and shares - the property looks after itself pretty well, but shares I check weekly. Just my personal strategy, but I think shares need some form of stop loss in place to save dollars or time.

This touches on another discussion I raised - even if holding quality shares long term for dividend flow (eg. banks paying increasing divs) - still times when best to sell - question of capital+time vs. dividend. Example - if have a bank share at $40/share paying 6% div - the share rises to $60/share - div stream is still intact but what if share price starts to fall from $60? - must be better to sell to keep gains rather than hold for div - maybe haven't worked it out yet...

Overall figures are an interesting thing - when people quote overall growth figures for the share market - it seem to me that the overall figure might be intact, but not necessarily individual companies. Example, we might be able to say the All Ords has acheived X% gain over Y years - but the All Ords is achieving that by constantly changing the mix of companies - bubbling the successful ones to the top and discarding the ones that fail or underperform. So we have to be careful that we're holding (and continue to hold) the companies that are successful. (I recently read that after the 1930s depression the indexes of markets recovered and looked OK after a while - but many companies failed - the recovery of indexes disguised the many individual failures.)

I suppose a managed fund should get around the problem watching individual companies - but that's a different beast and another topic

Thanks for feedback, much appreciated.

 

My experience with property has been all good, and with shares/funds - mediocre.

Yes there are larger numbers with RE but there are 3 key points for me -

1. We all live in homes. So therefore a large majority of houses are owner occupied and therefore stable.

2. You can add value. Either renovate, develop, or if lazy, buy house on land that has development potential.

3. LVR 80% at cheaper interest rates. I have been told that you can push shares to 80% LVR but the % rates are higher.

I use managed funds to support my RE, but that is the only reason I personally entertain shares/funds. And thats something I question all the time - I am always on the lookout for other ways to service my properties.

It is horses for courses.

 

Hi Rambada,

How do you use the funds/shares to support RE? Do you buy & sell to get cash or just dividends?

What are you thoughts on funds/shares as an investment in their own right as a balance to the RE?

Regards, Ilori

 

Hi ilori.

For me personally;

I started buying IP's a little while ago with no vision of ever getting into mgd funds/shares.

Fast forward ten years...saw one of Steves (Navra of course) presentations and decided to get into his mgd fund for the income.

Once I think the time is right, I can envisage selling off a few IP's, reduce debt, and leverage more into mgd funds that pay a good income.

So, for now, my portfolio is more weighted towards property, but as mentioned above, I think that will change when I decide it's time to "retire" as I believe mgd funds/shares are an 'easier' investment, i.e, less to worry about e.g tenants, pm's, rates etc.

That's the goal now, but who knows eh.

 

".....must be better to sell to keep gains rather than hold for div - maybe haven't worked it out yet..."

Ilori,

Something to think about:
You buy ZZZ at $20. It falls to $12 – so you lost 40% of your investment.
You may think that you are protected by your dividend, but at the div rate of 3.5% per annum you may get your initial investment back in 11 years.
Practically, you’ll never recover because of opportunity cost and concept of real cost of money.
I would never hold a share because of its dividend.
Only buy things you think are going up, if going down – simply sell.

 

so with this reasoning, are you going to sell your IP if the price goes down for a few years?

 

This is true, but why would you sell a property? You would only do so if there is a fundamental problem with it.. the same should apply to the shares.. Just to sell shares because the market is going down is flawed reasoning.

 

Do not confuse IP with shares.

 

because property never goes down in value......

 

not on a sarcastic note...

the reason why there are so many blogs, seminars, magazines, tv shows etc devoted to property is that there is lots & lots of money to be made from selling property.

There is a whole industry built around selling you property, think about how many people take a slice of the pie when you buy/sell a house:

developers, real estate agents, conveyencors, solicitors, banks, mortgage brokers, trades people, advertisers, insurance companies, local government, the tax man, valuers etc.

these people make insane amounts of money when you buy or sell, so they will do everything they can to insure people keep buying and selling property.

The reason you don't see a huge amount on investing in the sharemarket is that the money is not made when you buy or sell, but in the management fees they charge when you hold an investment through a managed fund, superfund or wrap account. buying and holding is not sexy at all.

plus you generally only have 1 or 2 groups trying to get you to invest, financial planners and brokers.

 

It seems you are also a bit confused...

 

That's a good way to think of it - could you explain what you mean by opportunity cost and real cost of money please?

Do you use a way to work at what point to sell? What if the share fell from $20 to $18, or to $16? Would it be best to hold or sell?

I'm very interested in this concept. I'm fairly vague about these things - but appears that literature talks about:
a) trading - ie. buy/sell for capital gain; OR
b) buy&hold - treat shares as assets and hold for dividend stream

But seems to me there must be middle ground, surely at some point it makes sense to trade any share, and at some point it makes sense to hold it for the dividend (assuming it pays a dividend).

How to make that decision would be a useful thing.

Few more things - trading vs. buy&hold:

1. Transaction costs - trading involves more transactions than a buy&hold strategy so trading must deliver better results to cover the higher costs.

2. Tax - not an expert on this, but I think - trading will receive a PAYG/PAYE tax treatment, but, buy&hold will receive CGT reduction if hold > 12months - again the trading strategy needs to outperform to overcome the tax disadvantage.

3. Dividends - a trading strategy is likely to miss out on dividends (because not holding long enough) but buy&hold should receive dividends - could give it a few percent advantage.

I'm only thinking aloud here - but seems to me that a trading strategy must significantly outperform a buy&hold to achieve similar end result.

Hmmmm... hope this isn't overcomplicating the original question above, but all part of it

Regards, Ilori

 

This might expel the 'myth' that more people invest in property or make it via property due to there been more property magazines shows etc.

How the rich differ from the rest | NEWS.com.au

It found that equity - or shares - was their biggest investment, with 33 per cent of money allocated to this asset class. Fixed income had 27 per cent, cash 17 per cent and property 14 per cent, while only 9 per cent of their money was in alternative investments such as hedge funds.

True wealthy people invest mainly in shares and take diversification seriously.

 

Thanks for the doc - all good information - just a note, names such as Perpetual, Hood Sweeney Securities, Ord Minnett referred to as sources mean they will talk about securities. I wonder if they recognise direct property as an asset class - no money it for them.

Regarding the figures - doubtful can assume the people became wealthy investing in the things they talk about - example 27% investing in fixed income - fixed income might be OK for holding money if have it, but unlikely to generate it in first place.

Thanks gain, regards, Ilori

 

Ilori,

You invest in XXX which returns say 5%, but other investment/shares etc return 10%, so your opportunity costs are 5% (10%-5%).
More is here: Opportunity Cost in Trading
Real cost of money: http://www.invested.com.au/85/what-s-real-cost-managing-your-35355/

To give you a sensible answer to all your questions is a scope for another book.
Before you do anything you need a basic knowledge. There is a lot of good books on this subject such as: 'The Art Of Trading' by Chistopher Tate, 'Share Trading-An Approach to Buying and Selling' by Daryl Guppy ect.

Money management, entry/exit, position size, stop loss/limit etc. are part of the system you should develop or you may use somebody’s system if you feel comfortable with it.
Exit (not entry) is the most important part. It is where you are making real money.
Basically, you should use exit strategy when instrument is changing direction.
To do this use weekly chart to check direction of the share/market (trend is your friend – most of the time).
There are a lot of indicators which can guide you in this case (entry and exit).
General rule = the total loss for any a single trade must not exceed 2% of your total capital.
eg. Total capital is $100,000 so 2% is $2,000. You bought 1,000 shares at $20 each for a total of $20,000. If share price went down to $15 your loss is $5,000. It is more then your 2% of your capital. You should sell your shares when the price was $18 ($2,000 loss) as it is a max amount you are prepared to lose.
By risking only 2% of your total capital on each trade it would take approx. 195 consecutive losses to blow your whole trading/investing account.

You can not avoid transaction costs and paying tax. They are both irrelevant if you face a decision to sell because something goes wrong.
I would rather share a $10 profit with a taxman than keep $5 loss for myself.
The only way to avoid risk, paying tax, transaction cost etc. is to do nothing and hope for a better future.
Only you can decide if div are more important to you than a good gain, but you can ‘marry’ both with a right strategy.