As I am in danger of being viewed as the forum ‘poet’, I thought I would write something a bit more practical and I hope I have chosen the right forum for it to be posted in ?
There seems to be an age-old debate about whether shares or property are the best investment vehicle. Rather than mow the same lawn twice, I thought I would just add some personal experience as food for thought.
One of the bottom line arguments is that you can gear property to a higher level than shares. Up until recently this has been so (at least in the UK, where I am from – but don’t hold pomminess against me!). So, if Mr Likely racks up with $10k in his pocket, he could quite feasibly get a $90k mortgage and if capital growth is say 8%, his property would be worth $108k at the end of a year. If you were looking at a return on investment (ROI), I think that would be 80% on his actual input of $10k (any number-heads please correct if using wrong terminology – ta). If you try and gear into shares with that same amount, you would be able to maybe get a bank to loan you another $10k perhaps – giving $20k in total to be invested. If shares were returning 16% growth, they would be worth $23.2k a year later – giving an ROI of 32% (hope I haven’t wandered off the road here?!)
So, usually you are presented with figures that show property gives a higher rate of return on your actual invested dollars, banks contribute a larger portion of funds and property is more stable. Sounds good. Maybe the major downside with property is that it is relatively illiquid and doesn’t always initially provide a great cashflow? That’s debatable.
Part of the argument against shares is that they are considered volatile, you are a very, very small player in the huge pond of the share market and therefore you have almost zilch control over your investment. Plus there are the numerous horror stories of people losing not only their shirts in the market but having to self off their firstborn too!
There is only so much you can do with money – spend it, save it, waste it or invest it (there may be more!). I was initially deterred from the stock markets by one over-riding emotion and that was – FEAR. Most attitudes to it are based on this…..you can’t control it (invokes fear), it’s very volatile, you could lose it all – just look at HIH et al (fear that I may make a bad choice)…the list can go on …… but thankfully I won’t! There are also people out there who feel that way about the property market but if they were to ask any of us, we wouldn’t have that overwhelming sense of dread as sound information, careful analysis and competence gained by experience push back those bogey-man boundaries and allows us to see that the risk in property can be minimised very effectively.
Even though this is a property forum, the real purpose of most of us investing is not property per se but the acknowledgement that property is perhaps the easiest and most available vehicle for achieving long-term wealth that is available to us average Joes (and Joesettes). If our real goal is long-term wealth creation, then to deliberately avoid the stockmarket out of FEAR of yourself and your capabilities with it, is to handicap yourself (in my ever so humble opinion!). If we choose to avoid it through a deliberate choice based on careful thought, a reasoned approach as to why it is unnecessary and we can show ourselves that our wealth creation will not suffer from non-involvement, then ok. But if anyone is at all like me, it’s your own fear and foibles that keep you out of this end of the investment pool – and it’s a shame, as property and shares working together form a good team – sorta like Batman and Robin!
The really good thing now, is that there are ways to take the advantages of the leverage available with property and use them in the share market too, thus reducing your risk. One of the main problems with using shares to create a cashflow throughout the year to supplement capital growth achieved through rental properties, is that you really needed gobs and gobs of cash to start off with. If you wanted to increase your yearly cashflow by, say $24k and shares were on average returning 12%; you would have to start off with $200k to achieve this. Seems a poor use of capital.
To make your capital work that hard to achieve a monthly income of $2k is where risk comes in. However, if you had $500k and still only wanted to earn $2k per month income from it, to supplement your salary and income from properties, then your money wouldn’t have to work so hard and therefore, you reduce the amount of risk you expose it to. In order for $500k to produce a yearly income of $24k, it only needs to produce a return of 4.8% - a lot more achievable than 12%.
For those interested in adding to their wealth creation, there are now systems that allow you to receive good returns without exposing yourself to the risk that is inherent in making your money work too hard. I use a UK based company and it lets me buy or sell shares with only 10% of the actual cost (5% if they are US or UK shares). Here’s an example from when I first started:
I wanted to begin by making a very modest monthly cashflow of $1,000 to start with. I decided to commit just $10,000 in my newly set-up trading account. Using a normal trading account, to get that monthly return from my initial investment, I would have had to get a monthly return of 10%! For me, that would have meant too much exposure to market risk (i.e. it could go all over the place!). However, through leverage @5%, I can buy UK or US shares worth $200,000 and in order for me to get my $1,000 from that amount, I would only need a monthly return of 0.5% - far easier to achieve.
So, as I was just starting out, I took a middle road approach and only used my leverage up to $100,000 worth of shares. Even with Aussie shares, it’s comparatively easy to make a $1,000 return over just a few days. Below is my first trade as an example:
Day 1
Sold 50,000 VOD shares @ 1.06 each – my cost is (1.06 X 50000) X 5% = 2,650
So, I sold 10,000 shares of Vodafone (worth $53,600) for a cost to me of just $2,650.
Day 3
Bought back those same 50,000 VOD shares @ 1.04 each, which cancel my position and leaves me to work out the difference as my profit.
(1.04 X 50000) = $52,000.
So the difference between what I sold for and what I bought back at was (53,600 – 52,000) = 1,600.
I’ve also deliberately shown an example that highlights an advantage in shares that property (to my knowledge) doesn’t have…you can profit when the market goes down. I sell something I don’t own in order to buy it back later.
I have been trading this way for a while now and while no system is perfect and yes, the share market is a volatile creature, it does allow me to use minimal capital for maximum leverage in order to achieve what is often so difficult in just using property only as a wealth creation tool and that is cashflow. I hope that by trading for at least two years, I will be able to show lending institutions that it can be regarded as a ‘reliable’ income. This allows me to invest in property for capital growth and trade shares for cashflow. I know there are some very able folk among us who can achieve both through property – my hat is off to you. I am not using myself as an example to push any system or say that it is better, rather just to say that for me at least, I view both as being integral to my financial future. I no longer argue as to which is best – everyone has to take a view. Like myself though, it’s always useful to check that your view is based on a considered view, rather than fear of your ability, knowledge or sense of competence….all these can be worked on….fear cannot.
As I am sure more regular posters will say (even if they consider this to be promotion of a system), if the personal plan is for wealth creation, then the WHOLE investment spectrum should at least be considered….why go through life thinking it is always an either or scenario?! If I lived in years gone by, I would rather have two strong horses pulling my cart than just one …. horses can suffer temporary lameness (can’t they?!).
There seems to be an age-old debate about whether shares or property are the best investment vehicle. Rather than mow the same lawn twice, I thought I would just add some personal experience as food for thought.
One of the bottom line arguments is that you can gear property to a higher level than shares. Up until recently this has been so (at least in the UK, where I am from – but don’t hold pomminess against me!). So, if Mr Likely racks up with $10k in his pocket, he could quite feasibly get a $90k mortgage and if capital growth is say 8%, his property would be worth $108k at the end of a year. If you were looking at a return on investment (ROI), I think that would be 80% on his actual input of $10k (any number-heads please correct if using wrong terminology – ta). If you try and gear into shares with that same amount, you would be able to maybe get a bank to loan you another $10k perhaps – giving $20k in total to be invested. If shares were returning 16% growth, they would be worth $23.2k a year later – giving an ROI of 32% (hope I haven’t wandered off the road here?!)
So, usually you are presented with figures that show property gives a higher rate of return on your actual invested dollars, banks contribute a larger portion of funds and property is more stable. Sounds good. Maybe the major downside with property is that it is relatively illiquid and doesn’t always initially provide a great cashflow? That’s debatable.
Part of the argument against shares is that they are considered volatile, you are a very, very small player in the huge pond of the share market and therefore you have almost zilch control over your investment. Plus there are the numerous horror stories of people losing not only their shirts in the market but having to self off their firstborn too!
There is only so much you can do with money – spend it, save it, waste it or invest it (there may be more!). I was initially deterred from the stock markets by one over-riding emotion and that was – FEAR. Most attitudes to it are based on this…..you can’t control it (invokes fear), it’s very volatile, you could lose it all – just look at HIH et al (fear that I may make a bad choice)…the list can go on …… but thankfully I won’t! There are also people out there who feel that way about the property market but if they were to ask any of us, we wouldn’t have that overwhelming sense of dread as sound information, careful analysis and competence gained by experience push back those bogey-man boundaries and allows us to see that the risk in property can be minimised very effectively.
Even though this is a property forum, the real purpose of most of us investing is not property per se but the acknowledgement that property is perhaps the easiest and most available vehicle for achieving long-term wealth that is available to us average Joes (and Joesettes). If our real goal is long-term wealth creation, then to deliberately avoid the stockmarket out of FEAR of yourself and your capabilities with it, is to handicap yourself (in my ever so humble opinion!). If we choose to avoid it through a deliberate choice based on careful thought, a reasoned approach as to why it is unnecessary and we can show ourselves that our wealth creation will not suffer from non-involvement, then ok. But if anyone is at all like me, it’s your own fear and foibles that keep you out of this end of the investment pool – and it’s a shame, as property and shares working together form a good team – sorta like Batman and Robin!
The really good thing now, is that there are ways to take the advantages of the leverage available with property and use them in the share market too, thus reducing your risk. One of the main problems with using shares to create a cashflow throughout the year to supplement capital growth achieved through rental properties, is that you really needed gobs and gobs of cash to start off with. If you wanted to increase your yearly cashflow by, say $24k and shares were on average returning 12%; you would have to start off with $200k to achieve this. Seems a poor use of capital.
To make your capital work that hard to achieve a monthly income of $2k is where risk comes in. However, if you had $500k and still only wanted to earn $2k per month income from it, to supplement your salary and income from properties, then your money wouldn’t have to work so hard and therefore, you reduce the amount of risk you expose it to. In order for $500k to produce a yearly income of $24k, it only needs to produce a return of 4.8% - a lot more achievable than 12%.
For those interested in adding to their wealth creation, there are now systems that allow you to receive good returns without exposing yourself to the risk that is inherent in making your money work too hard. I use a UK based company and it lets me buy or sell shares with only 10% of the actual cost (5% if they are US or UK shares). Here’s an example from when I first started:
I wanted to begin by making a very modest monthly cashflow of $1,000 to start with. I decided to commit just $10,000 in my newly set-up trading account. Using a normal trading account, to get that monthly return from my initial investment, I would have had to get a monthly return of 10%! For me, that would have meant too much exposure to market risk (i.e. it could go all over the place!). However, through leverage @5%, I can buy UK or US shares worth $200,000 and in order for me to get my $1,000 from that amount, I would only need a monthly return of 0.5% - far easier to achieve.
So, as I was just starting out, I took a middle road approach and only used my leverage up to $100,000 worth of shares. Even with Aussie shares, it’s comparatively easy to make a $1,000 return over just a few days. Below is my first trade as an example:
Day 1
Sold 50,000 VOD shares @ 1.06 each – my cost is (1.06 X 50000) X 5% = 2,650
So, I sold 10,000 shares of Vodafone (worth $53,600) for a cost to me of just $2,650.
Day 3
Bought back those same 50,000 VOD shares @ 1.04 each, which cancel my position and leaves me to work out the difference as my profit.
(1.04 X 50000) = $52,000.
So the difference between what I sold for and what I bought back at was (53,600 – 52,000) = 1,600.
I’ve also deliberately shown an example that highlights an advantage in shares that property (to my knowledge) doesn’t have…you can profit when the market goes down. I sell something I don’t own in order to buy it back later.
I have been trading this way for a while now and while no system is perfect and yes, the share market is a volatile creature, it does allow me to use minimal capital for maximum leverage in order to achieve what is often so difficult in just using property only as a wealth creation tool and that is cashflow. I hope that by trading for at least two years, I will be able to show lending institutions that it can be regarded as a ‘reliable’ income. This allows me to invest in property for capital growth and trade shares for cashflow. I know there are some very able folk among us who can achieve both through property – my hat is off to you. I am not using myself as an example to push any system or say that it is better, rather just to say that for me at least, I view both as being integral to my financial future. I no longer argue as to which is best – everyone has to take a view. Like myself though, it’s always useful to check that your view is based on a considered view, rather than fear of your ability, knowledge or sense of competence….all these can be worked on….fear cannot.
As I am sure more regular posters will say (even if they consider this to be promotion of a system), if the personal plan is for wealth creation, then the WHOLE investment spectrum should at least be considered….why go through life thinking it is always an either or scenario?! If I lived in years gone by, I would rather have two strong horses pulling my cart than just one …. horses can suffer temporary lameness (can’t they?!).