Should I invest in shares or property?

This is a question I love to discuss with our clients as it’s such a common one and often people have very polarised ideas depending on their experience. Personally, I’m invested in both shares and direct property, though which one is best should be tailored to your individual circumstances.

It’s important to note, financial advisers would commonly consider both these asset classes as ‘Growth’ assets meaning they are likely to give you longer term growth above inflation, though they are both higher risk assets and need to be held ideally longer than 10 years to achieve forecast returns.

Direct Property

For many Australians owning an investment property seems to be the most logical choice. Why? Usually because they have bought and sold their own family home, usually for a financial gain, and an investment property seems to be just one step removed.

One of the main benefits of owning an investment property can be gaining long term capital growth whilst only putting in a small amount of your own capital due to the ability to borrow with the property as security. This ‘benefit’ is what we call gearing. It’s important to note that gearing can give you access to higher growth on your initial investment, but it can also magnify losses during a downturn.

To succeed in property investment, you need to be able to sustain the strategy through good times and bad and this can be the reason many people lose on property i.e. being forced to sell at the wrong time. Common reasons to sell your property at the wrong time are; divorce, job loss, rising interest rates, issues with tenants affecting income and expenses and property value stagnation.

The current challenge with property is that, with average net rental yields hovering around 3.5% for a house in many suburbs (Quarterly Rental Review Report, CoreLogic, 2024), you are likely to be running a significant income loss each year with borrowing rates above 6%. This loss is commonly known as negative gearing and can provided significant tax deductions on income earnt, but you still have to be able to have enough surplus income in your budget to afford the loss each year!

Caution – Location and the type of property (home or unit) is a big factor when purchasing a property and can have a big impact on any gain or loss experienced.

Shares / Managed Funds

These days it’s relatively easy to access share markets through online brokerages like CommSec and nabtrade, though low-cost platforms like Spaceship and Raiz offer the opportunity to access shares via low-cost Exchange Traded Funds. It’s also important to note that a large portion of your superannuation is likely invested in shares and financial advisers have access to platforms that access vast numbers of products also.

One of the things I like about shares is the ability to access a broad, diversified portfolio by considering Exchange Traded Funds (ETF) and/or Manage Funds. These products are many and varied, though in their simplest form can give you exposure to Australian and International markets as well as a broad range of industries and sectors. This diversification allows you to avoid having ‘all your eggs in one basket’ and losing out on one company’s poor performance.

Shares are often seen as being more volatile than property due to the fact they are traded each business day via stock exchanges – it can be confronting to watch your wealth constantly change, though this also brings advantages such as the ability to buy and sell quickly i.e. having the ability to turn your investment back into cash (liquidity).

Similarly to buying an investment property, you can also use the equity in your home to borrow to purchase share-based investments though, as previously mentioned, this presents greater risks as well as greater opportunities for return.

In summary

Shares offer liquidity, diversification, and potential for high returns but come with volatility, market risk, and lack of control. Property provides a tangible asset, appreciation potential, and leverage opportunities but involves illiquidity, high costs, and market risk. Choosing between the two depends on an individual’s risk tolerance, investment goals, and financial situation.

As always it’s best to seek professional advice from a licenced financial adviser to give you the greatest opportunity to achieve your financial goals.

Written by Ross Buttenshaw, Senior Financial Adviser at Progressive Financial Planners

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