Investing in shares over the long term outperforms most other asset classes, including property, bonds and other alternatives.
The primary reason is that investing in Australian companies provides capital for these companies to produce goods and services and grow their business.
There are two rewards for investing in shares. One can come from receiving dividends which is provides incomes for retirees and also capital growth via a rising share price. Some savvy investors, like Warren Buffett are able to spot when it is a good time to buy shares that have declined in price but are still good companies that will continue to produce great products or services for their customers which leads to excellent investment returns.
When you invest in property, there are two sources of potential gain – from the rent tenants pay (commonly called the earnings yield) and the capital gain from selling the property somewhere down the track. In many cases, rent generated from the property does not cover the costs of servicing the loan and so negative gearing is important. However, the risk of investment losses can be high if the capital gain on the sale of the property does not eventuate. Many Australians will find that their potential for investment losses have increased as property prices fall back to earth.
Like the stock market, property prices can boom as we have seen recently in Australia and when they do there is plenty of money to be made. However, over the long term property prices don’t deliver much by way of capital gains. This often surprises many but once you account for inflation, property can disappoint as an investment.
There are also high transaction costs with property including the need to pay government stamp duty and other charges, capital gains taxes and real estate agent fees. And as many property investors are discovering, selling investment properties in a hurry can be difficult as they are a very illiquid asset. By comparison you can sell stocks in a click.
Stocks have several advantages in that you don’t need to borrow large sums of money to start your investment journey; you can sell some of your shares unlike property where you cannot sell a bedroom; and buying shares can be great way to teach children about investing and money.
Over the long term, stocks provide a better return than property, but that is not always the case. There are times when it make sense to invest in property or government bonds, so it is important to understand that there are no hard and fast rules to investing.
But what is critical for investors, whether property, shares or other investments is having and maintaining a set of principles that can be applied to all investment to assist in making clear which investment is set to deliver of higher rate of return.
At www.stockmarketmentor.com.au I can teach you to a set of investment principles that arm you with the ability to determine which investment option is the best for you.