Shares vs property: where do I invest?
Guess what - there’s no quick answer to the million dollar question of where to invest your hard-earned cash. However, there are some basic facts and rules that can help guide your decision.
Property is best, right?
We all love property. We all want to buy property. Whether we can afford to buy it is another question, but we all talk about house prices. Property has, after all, turned thousands of Britons– mostly the post-war Baby Boomers - into multi-millionaires.
House price data from Nationwide building society offers some killer facts - if you bought an average house 40 years ago, you’d have paid £13,820. Today, you could sell it for £211,443. Off the top of my head (ahem) that’s an overall increase of 1,429%. Amazing, eh? Well sort of.
It actually equates to an average growth rate of just 7%. Pretty modest.
So how did everyone get rich?
Debt. Nearly every homeowner loaded up on it.
In financial industry parlance, it’s called leverage. You buy a house for £100,000 and you borrow £20,000 for the deposit. The house price rises by 50% to £150,000. But your return is not 50%, it’s 62.5%. This is because your £80,000 investment has increased by £50,000.
We’re often lectured about the evils of borrowing (rightly so when it’s excessive) but a little bit of sensible borrowing has its merits.
Did anyone get rich from investing in shares?
The perfect advocate for stock market investing is the billionaire Warren Buffett. One of the world’s richest men, he initially built a fortune by fastidiously buying shares he believed were unfairly undervalued. According to Business Insider, he achieved a return of 24.5% a year, after fees, between 1957 and 1969 compared to only 7.4% for the Dow Jones stock market index. Today he’s number three on the Forbes Rich List, worth $86bn.
Investors should always be cautious of past performance figures: they offer no guide to the future – whether it’s property or shares. Extraordinary periods of returns may be just that – unusual one-offs. Mr Buffett was pretty pragmatic about it in 1967. He said: “The results of the first ten years have absolutely no chance of being duplicated or even remotely approximated during the next decade.”
That’s a healthy, sceptical investment attitude.
So Buffett’s success is one thing. Looking more broadly, you can look at other data. The Credit Suisse Global Investment Returns Yearbook suggests stock market returns were 5.1% a year, with inflation taken into account, between 1900 and 2016. In the golden era, from 1980 to 1999, the annual return was 10.6%.
This may sound modest against the property price gains - but the house prices numbers did not take into account inflation. Official data shows the average UK inflation rate for the last 40 years has been 4.4%. So a 7% annual gain is reduced to less than 3%. Not so great.
So … where do I invest?
Give us a break. We said we couldn’t answer that.
What we can say is that financial advisers usually urge their clients not to put all their eggs in one basket. They tend to suggest having some money in cash, for emergencies (the advice tends to range from three months worth of salary to one year) and then some money invested in the stock market or maybe the bond market. It is also fairly easy to invest in commercial property through the markets (without the need for a mortgage deposit)!
Assuming you have the pile of money needed to form a deposit, it’s no bad thing to get a foot on the property ladder. For many people, that may be all the property investment they need.
Don’t take our word for it. Everyone has a different situation and it’s always a good idea to talk to an independent financial adviser.
Read more: Six steps to start off investing
Read more: Why I fell in love with renting