Is it better to invest in shares or property?

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For an investor trying to build wealth and achieve financial independence, a question they will inevitably face is whether they should be sending their savings into stock market investments, or paying off an investment property instead.

Unfortunately, an accurate comparison of these two investment options is not possible. Each has its pros and cons, and it’s through an evaluation of these that investors can find the right path.

Shares versus property is an age-old investment question, but in reality, it may be unanswerable.Credit: Monique Westermann

When investing in property you are purchasing a single asset that will likely have a single tenant. The equivalent with shares would be buying a single company share, but in practice that’s not what people do.

When we invest in shares we invest in a portfolio, a mix of different businesses. This diversification means that the share investment holds considerably less risk than the highly focused property investment.

You may view risk as a negative, and while that isn’t unreasonable, a better way to think of risk is as a range of potential outcomes. For a single property, the potential upside could be significant. Gentrification of a suburb, rezoning, or, until recently, unusually low-interest rates inflating prices, could mean big rewards.

On the flip side, a property investor might get terrible tenants, the property itself might turn out to be termite infested, or the local Hells Angels club moves in next door. The range of outcomes is very broad, so it is, therefore, a high-risk investment, one which you’ll almost certainly have borrowed to undertake.

For someone investing in shares, they’ll typically use funds that have hundreds or even thousands of different companies within them. Some of these companies will experience fantastic growth, but there will also inevitably be some losers. It is the offsetting of the winners and losers that reduces the range of potential outcomes in a share portfolio, thus making this a lower-risk investment relative to the single property.

Indeed, with a mainstream share fund, we can often look at long-term data to get a fairly accurate sense of the likely average return over a period of 10 years or more. While there are some similar sources of data for property, because you are not buying a portfolio of properties the data’s applicability to your particular circumstance is negligible.

But instead of trying to focus on which investment will give you the better outcome, a better approach is to determine which option suits your circumstances the best.

Property investment has a couple of key draws. If you’re a tradesperson or someone who’s handy generally, property holds the potential for you to add value through your own sweat. Additionally, property is easy to gear, and while gearing increases risk, someone looking for a high risk, and (hopefully) high reward investment option property may be the best fit.

Any investment strategy involving gearing is likely to suit someone with dependable income, providing them with the confidence that loan repayments can be met even if the property were to be untenanted.

Stock market investments, however, might suit someone where there’s a little more uncertainty about their ongoing savings capacity, or perhaps just their future plans. By not needing to borrow, a wealth creation strategy built upon monthly stock market investments provides flexibility.

The regular monthly additions could be changed or paused at any time, and if things really got challenging some or all of the share portfolio could be sold down at negligible cost, with the cash back in your bank account in a matter of days.

Shares versus property is an age-old investment question. The reality is it’s an unanswerable question. You need to find the strategy that works for you.

Paul Benson is a Certified Financial Planner, and the host of the Financial Autonomy podcast.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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