Residential property has been a red hot favourite among investors for some time now. But a recent report is a reminder that Australian shares shouldn’t be overlooked when it comes to healthy long term returns.
The latest ASX/Russell Investments Long-term Investing Report sets out the investment returns earned by mainstream assets over the last 10-year and 20-year periods. It found that over the 10 years ended 31 December 2013, Australian shares topped the league table, dishing up before-tax returns averaging around 9.2% annually. On the other hand, residential property mustered annual returns averaging about 6.1% over the period.
However, the picture is quite different if you go back over the last 20 years. Both local shares and residential property performed well, with property coming out on top. Australian shares averaged annual before-tax returns of about 8.7% compared to 9.9% for bricks and mortar. For the record, cash investments returned 3.7% and 3.8% annually over the last 10 and 20 years respectively, with inflation averaging 2.7% p.a. over the 20 year period.
It goes to show that shares and property can be equally solid long term investments – as long as you are prepared to hold onto the investment for a reasonable period of time.
However long term gains aren’t the only issue to consider when selecting investments.
One of the big pluses of shares is that you don’t need much money to get started. You also don’t need to take out a big loan to become an investor. More importantly, shares make it far easier to minimise the impact of market fluctuations with a process called ‘dollar cost averaging’. Let me explain. Anyone investing in property in a city like Sydney at present is buying in a very hot market. That means paying top dollar for your rental property. If values were to cool over the coming months or even years, you don’t have many options other than to hang on until the property market recovers, or if you can no longer afford to hold onto the asset, to sell up and wear the loss.
With shares though, it’s possible to drip feed your portfolio by investing a set amount of money into the sharemarket each month, quarter or every six months – whatever you choose. That’s what dollar cost investing is all about. The frequency of your share purchases doesn’t matter – the main thing is to carry the process through regardless of how markets are moving.
The appeal of dollar cost averaging is that it forces us to buy more shares when they are cheap, and buy less when they are most expensive. The end result over time is that the overall value of your shares reflects more of an average price. It means, on average, you’re not overpaying for your shares, which also helps cushion a loss if you need to sell some shares during a market dip. With this technique you are also steadily building up your share holdings over the years.
It’s a discipline worth using, and the ability to tap into dollar cost averaging is a tremendous advantage that shares have over residential property.
It’s worth stressing that both shares and property can be excellent long term investments. If you are thinking about purchasing a rental property right now, be sure to weigh up the possible downsides and consider if property will genuinely help you achieve your long term goals.
If you’re uncertain what sharemarket investing involves, take a look at my book Making Money or check out the government’s Money Smart website.