Courtney C. Lipsey Investors who are trying to achieve financial independence and build wealth will face the question of whether or not they should invest their savings in stock market investments.
My experience has shown that most people make their decisions based on personal preferences and comfort rather than facts. It’s not uncommon for me to get a question about which direction an investor should take from someone who is genuinely unbiased.
It is impossible to compare these two options. Investors can evaluate the pros and cons of each option and choose which is best for them.
It is not possible to compare shares and real estate as an investment because you purchase a single asset, which will most likely only have one tenant. In theory, you could buy a single share of a company. But in reality, people don’t do that. Very wisely.
We invest in shares to create a portfolio of businesses. The share investment is less risky because of this diversification than a property investment that has a high focus. When I say “risk,” your mind is likely to interpret this as something negative automatically. While this is not unreasonable, it is better to view risk in terms of a variety of possible outcomes. The potential upside for a single asset could be substantial. Gentrification, rezoning, or, as we have seen until recently, the unusually low rates of interest that inflated prices could bring big rewards.
On the other hand, a property owner could get bad tenants, find out that the property is infested with termites, or have the Hells Angels move in next door. When it comes to investing, the possibilities are endless. It is, therefore, a high-risk investment.
You’ll also almost certainly need to borrow money for this investment.
Gearing, also known as borrowing, is a way to magnify an outcome. Gearing magnifies positive outcomes when things are going well, but gearing can make things worse when things are not going well.
The interest on debt increases the risk of a negative outcome.
Those who invest in shares will typically use funds with hundreds, if not thousands, of companies. Some companies in those funds may experience phenomenal growth, but there are also bound to be losers. The offsetting of winners and losers reduces the potential range of outcomes in a portfolio of shares, making it a less risky investment than a single property. In fact, if you are investing in a fund that tracks a mainstream index, we can look at long-term data to estimate the average return for a period of up to 10 years. While there are data sources for buying property, their applicability is minimal because you’re not purchasing a portfolio.
It is better to consider which option best suits your situation rather than focusing on the investment that will yield the best results.
There are two main reasons to invest in property. Property investment is a great option for those who are handy or tradies. The property is also easy to gear. Gearing can increase risk. If you are looking for an investment that is high-risk and high-reward, then property could be the right choice.
Anyone with a highly reliable income will benefit from any investment strategy that involves gearing. They can rest assured knowing they can pay back the loan even if their property is unoccupied.
Stock market investments are a good option for someone uncertain about their savings capacity or their plans. A wealth creation strategy based on monthly stock market investment provides flexibility because it does not require borrowing. Regular monthly additions can be changed at any time. If things get tough, you can pause or stop them.
The age-old question of whether to invest in shares or property has never changed. This is not an apples-versus-oranges comparison. This is an apple versus orchard comparison.
It’s impossible to answer.
Find the strategy that suits you. You may choose to invest in shares, property, or both. It is not necessary to choose between property or shares. Many investors have both.
It’s more common for people to start with property and then switch to shares because they are hands-off rather than to see share investors convert to property, although I’m certain such people do exist.
