Your best investment - bricks and mortar or stock market?

INVESTING

By Danielle Jenkins

28-05-2018
If you have somehow managed to resist the lure of all that smashed avocado and stash yourself away some savings, the next challenge ahead of you is where to invest your hard earned. The decision often wavers between investing in the safe and relatively predictable property market, or trying your luck on the lucrative but unpredictable stock market. The choice will come down to your personal needs and values but it’s good to have a sense of which is a better strategy to achieve your goals, before you forge ahead.

There are of course pros and cons for each but there are some constants for both that can really help you define your choices. The value of your investment will be affected in both cases by the market itself – either the property market or the stock market. Generally speaking though, property tends to be more stable, while stock investments are less predictable but offer a greater chance to diversify if things aren’t working.

How Much Do You Have to Invest?
For many, getting into the property market has a significant barrier to entry in the form of the large wad of cash needed for a property deposit. The stock market can be more inviting for the less patient among us, especially if we can turn our small amount of savings into a larger house deposit by way of a few savvy stock investments. With property, you will nearly always get your money back, while with stocks you could lose everything at a moment’s notice Again, the key is to invest wisely and with your most important goals as the priority.

How Much Risk are You Prepared to Take?
Historically speaking, the Australian property market is relatively stable so property investment is theoretically far less risky than investing in the stock market. The property market can and does fluctuate from time to time, but it mostly adjusts itself back and it just might mean you have to tighten your budget for a period of time until things level out. The opposite can be said for the stock market – in fact it’s very appeal is that you can go to bed poor and wake up rich! However more often than not the opposite is the case – a spike in the market leads to the flowing of champagne, only for you to wake the next day and discover it all came crashing down while you slept.

The Ins and Outs of Property Investment
The saying ‘as safe as houses’ does not come from nowhere. Property is considered a solid investment because it addresses one of the essential human needs – shelter. Human beings always need places to live and as long as that’s the case, property will always be a reasonable investment choice. It offers flexible options through the various stages of life and if it’s in a good location, well maintained and upgraded periodically to improve its value, it can become a lucrative asset if and when the time comes to cash it in.

As mentioned previously, the downside is the hefty barrier to entry in the form of the deposit. In its defence – you will always get that money back with property, but it’s all the money you pour into it after the deposit that can be off putting. Buying a house also represents a coming of age - many people are reluctant to sign themselves up for decades of debt and responsibility, when they can delay ‘growing up’ a little longer. Living your life freely without the burden of covering a mortgage or dealing with unexpected repair costs is of course the more attractive choice! But there’s always a price and many middle-aged Australians are kicking themselves now in an increasingly inaccessible property market, that they didn’t get in early, back when the door was wide open.

Tax benefits used to be a great reason to invest in property but sadly as of the 2017 Federal Budget, there has been some erosion of the benefits. Claims on costs related to maintenance and upkeep of a property served as great incentives for people to invest in property in the past. The sheen may have dulled, but given the rapid rate of change in the Australian government, it’s only a matter of time before things shift and hopefully new opportunities for tax perks will emerge.

Property investing is a great choice for those looking for a solid low risk investment that can be taken care of by others (real estate agents, property managers, tradespeople) at a relatively low cost. A large percentage of Australians earning less than $80,000 per annum see property investment as the key to a secure retirement. Most of those people will buy one investment property, which over the course of several decades could set you up very nicely unless you have long term ambitions of becoming a property tycoon in mind.

The Ins and Outs of the Stock Market
If you like a little more adventure, then the stock market can be an exciting way to get yourself into investing. From really basic entry-level options like Acorns, to investing your first $5,000 savings into a low risk starter portfolio, stock market investing can be a welcoming place for beginners. It can also help you to earn a deposit for a house sooner, rather than toiling away for even longer trying to save. The barrier to entry here however is the complexity of the market. Unless you have a passion for learning about stocks, bonds and shares, and investment portfolios and strategies, you will have to pay someone else to take care of it for you. A decent chunk of your money can be spent here and you rely on your faith and trust in a stranger to take care of things on your behalf.

If the risk doesn’t deter you, the stock market offers a level of flexibility and opportunity that cannot be matched in the property market. You can diversify your investments and spread your money across a number of areas to counterbalance the risks. You can also invest based on your personal values by choosing investments in ethical portfolios that provide you with moral satisfaction or indulge your passions in start-ups or new innovations that transform the way we live, like Airbnb and Uber – we see you Ashton Kutcher.

Stock market investments do limit your access to your money and aren’t great if you want immediate short-term cash flow. They are also vulnerable to things outside of your control. However, the rewards can be breathtaking if you are persistent and patient all at once. If you manage your investment yourself and treat it like a part time job, you can have some control over the level of risk you are prepared to take and if someone else takes care of it for you, you can do the same thing by establishing a good working relationship with them (if that fails find someone else).