Time for a reality check
By Peter Thornhill *
Headlines about the sharemarket plunging, crashing or even melting down may be great for selling newspapers, but it also has a subliminal effect on our attitudes about shares.
It all helps foster the myth among novice investors that property should be their sole investment solution - simply because it seems more reliable.
Let's look at some of the myths, and the reality:
Myth 1: I know property
It is staggering how many people claim to have expertise with property, apparently only because they're surrounded by it. They follow local prices and extend this knowledge to the property market in general - or perhaps just glance at the colour photographs in the real estate pages and dream a little.
These are not the thoughts or emotions that run through our minds in relation to shares in Australian businesses.
But then, our house prices don't appear on television every day, reminding us of the short-term volatility of property prices, as well as our eagerness in trying to make a quick buck. You should never mistake familiarity with expertise.
Myth 2: Property is always a good long-term investment
One of the drawbacks of property - its lack of liquidity - makes it an attribute to the ill-informed. Because property can't be sold quickly when sentiment is negative or cash is required in a hurry, shares are usually the first assets to go.
Wise investors like the liquidity of shares. Shares can also be a great long-term investment - when they're not performing to expectations, wait until prices improve before selling, just as you would with property.
Myth 3: You can't lose money in property
The assumption that you can't lose money in property can often lead to paying too much for it. People also ignore the costs of holding on to property for long periods. Although the price might have risen, the value may have declined. Not all property goes up and not all shares go down.
Let's now consider some reasons for considering shares as an alternative to property.
Tax effectiveness
Shares can be geared just as easily as property. Gearing means borrowing money and using it to generate an income. When used in this way, the interest is tax-deductible.
In general, dividends are more stable and will grow faster than rents when all costs are considered. And if shares are selected wisely, they provide tax credits not normally available with property. One more important fact, just because you can borrow more against a property than shares doesn't make it a good investment.
Reducing risk through diversification
Because you can't buy 20 properties at the same time, fortunes are usually linked to one property in one suburb, in one city, in one country and one economic cycle.
But with shares we can obtain a stake in many businesses in many countries with much less than what it costs to get into property. If one country suffers an economic downturn, this does not necessarily affect the whole portfolio.
Looking towards the future
One of the greatest changes of our time is the global mobility of capital and technology.
Our parents might have lived and died in one town, often in one house, relying on immobile capital and technology to provide a job for life, but our children will live in a global village, and must become as mobile as the capital and technology they seek to use.
I urge you to consider that property may not be the lucrative and safe investment we have always assumed it to be. Even though property seems easier to understand at times, we shouldn't let lack of knowledge deter us from exploring alternative investment strategies. Speaking to your adviser about your own particular objectives and needs is the best way to ensure you make the right investment decisions.
* Peter Thornhill has worked in the financial services industry for 35 years, and runs seminars on wealth creation. He is a former general manager of MLC. The above article is adapted from his book 'Motivated Money'.
