Sunday, January 30, 2011

Investing In Shares Or Property - Which Is Better?

This is a question which can almost cause good friends to come to blows. It seems that investing in residential property is such an emotional issue for some people. Well to add fuel to the fire I found the results of a study published last year found that investing in shares produced a better after tax return than investing in property.

The report was commissioned by the Australian Stock Exchange and prepared by Russell investments. It investigated the returns of a number of asset classes over the past 10 and 20 years taking into account the impact of investment costs, tax and borrowing on the on the final performance figures.

The headline result (certainly from the ASX's point of view) was that Australian shares outperformed all other asset classes on an after tax basis over 20 years for investors on both the lowest and highest marginal tax rates.

However, over 10 years, Australian residential investment property was the winner. The GFC had a major impact on the performance of Australian shares over that period.

While the long-term performance of Australian shares as pointed out by the report has been used for marketing purposes by the ASX, there are a number of other conclusions made by the report which are important for investors regardless of your preferred asset class.

Borrowing to invest has been a winning investment strategy. Both Australian shares and Australian residential investment property returns have more than offset the costs of borrowing to invest in these asset classes.

Tax is also an important consideration. It has had a major impact on the final performance figures. The report also points out that dividend imputation for shares and the capital gains tax discount for both shares and property give these asset classes an advantage over bonds and cash.

The report is only around 10 pages long and is well worth reading. Regardless of the actual performance figures, I found it provided an good framework within which to think about investment performance.

You can view a copy of the report here:


Kerrie Setiawan said...

How about both shares and property. Property for long-term capital gain and shares for cash flow. Covered call writing is an income generation strategy analogous to renting out your shares monthly or weekly.