There’s no quick answer to the question of where to invest your hard-earned money. However, there are some basic facts and rules that can help guide your decision.
Is property best?
We all love property. We all want to buy property. Whether we can afford to buy it is another question, but we all talk about house prices. Particularly for Baby Boomers, property has turned out to be a good investment. House price data from the Australian Bureau of Statistics supports this view. If you bought an average house in Sydney 40 years ago, you’d have paid $50,700. Today, you could sell it for $875,000. That’s an overall increase of 1,626%. Amazing, right? Not quite.
It actually equates to an average growth rate of just 7.38%.
So how did everyone make money?
Debt. Nearly every homeowner loaded up on it.
In financial industry parlance, it’s called leverage. You buy a house for $100,000, you pay a 20% deposit ($20,000) you borrow the remainder $80,000. The house price rises by 50% to $150,000. But your return is not 50%, it’s 250%. This is because your $20,000 investment has increased to $50,000.
We’re often lectured about the evils of borrowing (rightly so when it’s excessive) but a little bit of sensible borrowing has its merits. Of course, the caveat to this is that while leverage can amplify returns when house prices go up, the reverse is also true if house prices go down. It is important to remember that all investments carry risks and that the value of investments and the income from them may go down as well as up and you may not get back the amounts originally invested.
What about shares?
The perfect advocate for stock market investing is the billionaire Warren Buffett. One of the world’s richest men, he initially built a fortune by fastidiously buying shares he believed were unfairly undervalued. According to Business Insider, he achieved a return of 24.5% a year, after fees, between 1957 and 1969 compared to only 7.4% a year for the Dow Jones stock market index. Today he’s number three on the Forbes Rich List, worth $86bn.
Extraordinary periods of returns may be just that – unusual one-offs. Mr Buffett had a pragmatic approach in 1967 when he said: “The results of the first ten years have absolutely no chance of being duplicated or even remotely approximated during the next decade.”
That’s a healthy, sceptical investment attitude.
Buffett’s success is one thing. Looking more broadly, you can analyse other data. The Credit Suisse Global Investment Returns Yearbook suggests stock market returns were 5.1% a year, with inflation taken into account, between 1900 and 2016. In the golden era, from 1980 to 1999, the annual return was 10.6%.
This may sound modest against the property price gains – but the house price numbers did not take into account inflation. Official data shows the average Australian inflation rate for the last 40 years has been approximately 4% per year. So a 7% annual gain is reduced to approximately 3% after inflation.
How can I decide where to invest?
What we can say is that you shouldn’t put all your eggs in one basket. Financial advisers often suggest having some money in cash for emergencies (the advice tends to range from three months worth of salary to one year) and some money invested in the stock or bond markets. It is also fairly easy to invest in commercial property through the markets (without the need for a mortgage deposit)!
Assuming you have the funds needed to form a deposit, it’s no bad thing to get a foot on the property ladder. For many people, that may be all the property investment they need.
Remember past performance is not an indicator of future performance – both in the share and property market. It’s always a good idea to talk to a financial adviser before deciding what’s right for you.
Published by Schroders
This material has been issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders) for information purposes only. It is intended solely for professional investors and financial advisers and is not suitable for distribution to retail clients. The views and opinions contained herein are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other Schroders communications, strategies or funds. The information contained is general information only and does not take into account your objectives, financial situation or needs. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this material. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any references to securities, sectors, regions and/or countries are for illustrative purposes only. You should note that past performance is not a reliable indicator of future performance. Schroders may record and monitor telephone calls for security, training and compliance purposes.