By Matthew Bennett

The debate between shares and property as to which is the best investment will no doubt continue as long as they both exist – forever! In the end the decision will depend on numerous personal circumstances and goals. However, it is important to be aware of the factors that can make shares a better investment choice than property.

An investment in shares can mean a lot of things. While many people think only of picking stocks and Wall Street – investing in direct shares – they don’t realise that they already have an exposure to shares in another form; superannuation. Almost all working Australians have a super fund that invests in a managed fund or portfolio of shares. An investment in shares also presents the opportunity to be invested in property in vehicles such as listed property trusts.

So what are the advantages of investing in shares? Consider performance, diversification, liquidity and tax implications just to name a few – all of which can be summarised by the flexibility that share investments offer.

Diversification is the spreading out of risk across various sources. The volatility of shares can be managed by not investing all your “eggs in one basket”; that is just one industry or one company. By spreading out investments over a broad range of shares in different industries it ensures an exposure to the gains and losses of the entire market.

Managed funds (where a fund manager does the research and selects the appropriate direct shares to hold in their portfolio dependent upon their investment mandate and goals) offer investors a wide range of investments that target different sectors, returns and styles of investment within the market. Different managers react to situations in the market differently giving varied response to events and result in further diversification.  Investment in property is much more like having all your eggs in one basket, focusing your exposure on one property. Thus, housing prices might rise in Melbourne, but if your property is in Sydney then you miss out. For this reason, it is easier to diversify a share investment, making it a safer investment.

Another component of the flexibility share investment offers can be captured by the term ‘liquidity’. Liquidity refers to how quickly and easily an asset can be converted into cash and/or back into the asset. In this respect shares are a better investment than property as they allow access to your money in a much more timely fashion, as well as the ability to easily increase your investment. One could easily go online to a discount sharebroker and place a trade today – buying or selling an investment. For a property owner to do this, they would need to list their property, possibly conduct inspections and then wait for financing, contracts and cooling off periods before the settlement and exchange. Instead of the minutes and days associated with a share purchase, the property process could take months – which could be critical when it comes to the timing of cash flows.

Another great advantage is that a share is exactly that – a share, or a portion of an asset. This gives the benefit of being able to buy and sell at more specific price points. If you are in need of $5000 to pay for a holiday, then a small parcel of shares can be sold to give this amount. This kind of adaptability is not as easily available on property. Have you ever tried to sell half a house? An investment in shares allows a portion of a portfolio to be easily sold off. This flexibility is increasingly valuable when it comes to considering capital gains tax. The sale of shares can be easily conducted over two financial years, making trades on June 30^th and July 1^st spreading the tax liability.

Further, tax benefits include franking credits that may be associated with share dividends. These franking credits exist when a company has paid tax on the dividend they distribute and act as a tax offset to prevent double taxation. This can have a significant impact and value for those in the high-income tax brackets.

One of the main disadvantages that people quote about shares is that they are volatile and are worth nothing if a company goes bust. While shares can become worthless, this is hardly a common occurrence. These arguments are usually shared with the belief that property prices never decline and houses will always be in demand. In the current US market there are whole neighbourhoods of brand new houses that have never been lived in! In some instances prices are just 20% of what they were four years ago. Share prices are volatile to an extent as they do fluctuate daily. This should be seen as an advantage! It is only because shares are priced daily that the liquidity and flexibility exists allowing investors to make transactions when they want.

If an appropriate long-term approach (shares are a long-term investment in the growth and performance of a company) is taken to share investment then these daily fluctuations are not as important, especially when the long-term performance is taken into consideration. Indeed “Australian shares have outperformed residential investment property to provide the best ‘real’ returns to local investors over the past two decades, according to this year’s Russell Investments/ASX Long-Term Investing Report.” ¹ When it comes down to the bottom line, shares have outperformed property after fees and taxes – that in itself is a compelling argument for share investment.

So... shares or property? Both have advantages and disadvantages and it will really depend on which investment you feel more comfortable making. As always, you should seek professional financial advice that takes into consideration your specific position, circumstances and goals before entering into any investment.

¹ http://www.asx.com.au/about/pdf/20100526_russell_asx_report_media_release.pdf