Property Versus Shares: No Contest

You might think from the title of this article that I’m going to take advantage of the recent share market volatility to kick a good investment when it’s down. As much as it’s tempting, I’m not going to make you read through another set of graphs arguing the comparison between property and shares. In reality, for most people there is no contest between property and shares.

I admit it, I’m biased. I like property. While I trade in the equity market, my first love is property. But this is the very hub of my argument – I’m not alone. You’re biased too. In fact we all are.

It’s this very individual bias that has more impact on successful investing than scores of expert opinions about the merits of various investments. Thankfully we are all different, otherwise we’d all be buying the same house or shares.

The truth is, as a means of creating wealth, property and shares are very different and they are suited to very different types of people.

Property investment is really a “business”, albeit usually part-time, rather than an “investment.” In many ways it’s not unlike buying a franchised business – particularly if you are buying from professional property investment advisors who help you with the “business” systems.

You buy or build your asset which you operate for a period of time. You have regular trading revenue (i.e. rent) and operating costs (e.g. interest, management fees, maintenance cost). At some point you decide to sell your property and hopefully it’s increased in value to provide you with a profit. It’s just the same as if you were a franchisee.

The key to success here is that as a property investor you have to be prepared to involve yourself in the “operation” of your property business. Some would see this as a hassle while others see this as a key advantage.

The advantage is that by having direct control of your property “business” you have the choice to work your “business” to increase its value. This could involve, for example, small renovations or larger scale sub-divisions. You can create equity yourself.

In particular this suits people who are self-employed or people who like a tangible asset. These people like control over their own destiny.

By contrast shares suit those who are more interested in passive investment without overhead costs and where someone else (usually a Board of Directors) is in control of growing the asset. It also suits people who are more analytically oriented and like to research the ins and outs of various companies and markets.

Of course, there are also those who find the equity markets more thrilling and enjoy the daily entertainment of share market reports bookended by the weather report and the tattslotto results.

Jokes aside, the bottom line to all of this revolves around two emotional rather than analytical considerations.

First you will commit time to what interests you. If you commit time to something you will be more knowledgeable and therefore you are more likely to make good investment decisions. I was sitting with a client recently who had six investment properties and he said “I’ve tried the share market but it all seems too much hard work. I just keep coming back to property”. There will be another group of people who will say exactly the opposite.

The other consideration is what I’ll call the 3am factor. I don’t know what it is about lying awake at 3am but it brings out the demons. So if you’re someone who lies awake at 3am worrying more about the mortgage debt on your investment property and your tenants then property doesn’t sounds like it will be much fun to you. If you’re lying awake worrying about the foreign debt crisis and share market crashes then equities may be too stressful and sleep hard to find.

In summary, you’re more likely to succeed with something you put your positive attention on and so your emotional response to your investment choice is really more important than some other person trying to convince you by some “rational” argument towards one form of investment or another.

So I’d suggest you take some time to consult your emotional compass to see whether property or shares make you excited. It’s not a competition but a personal choice. But I hope you find excitement in one or the other because I’d hate for you to end up lying awake at 3am worrying about why you aren’t being paid enough per hour to support the lifestyle you’d like.