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Equities vs Property


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Many of the STRs have been talking about withdrawing from the property market until prices calm down before buying back in at a more sensible price. History tells us however that house price slumps

a ) are drawn out

b ) are accompanied by bull runs on the stockmarket ("Sinking real estate means rising stocks

" http://moneycentral.msn.com/content/P17452.asp?Printer)

Interstingly one day after a reported asking price fall of 2% (in the five weeks to August 14) Google floats on the nasdaq and posts an 18% rise. Forgive me, I'm gonna say that again: Google rises 18% on float day (Google Shares Hit $100.34 in Market Debut

But why would you want to leave property for equities if you think beyond th eimmediate possible outperformance by equities: after all, over the long run property outperforms equities, doesn't it?. Well, the jury isn't as decided as some would have you believe on this one.

Here's a graph that shows real returns for US stocks with rental income / dividends reinvested from 81:

Pag18b.gif

This shows equities well ahead of property despite the torrid 2000-2003 phase (see http://www.watsonwyatt.com/europe/pubs/lon...2.asp?ID=10991)

Then there's this :

us%20stocks.jpg

(see http://www.travismorien.com/FAQ/portfolios...erformance.htm)

I'd guess 1920 is about $300 (it's a logarithmic scale), which for 84 years lands us at about 10% annualised. Not great, but hardly disasterous.

For property I dredged up this:

histpriceslog.gif

(see http://www.wheresmyproperty.com/prices/historic.htm)

As you can see, the $1 stock and property index graphs (both log) have a value of about 1000 in 1946. If anything the property index starts from a higher value. It ends 2002 just above 100, 000 (remember it's logarithmic). The stock chart shows a close of, i'd guess 500,000 (5 times the amount, although I do concede it has dividends reinvested).

So whilst you are sitting back counting your money, you might start to wonder what everybody else might be doing with theirs....

Those close to the stockmarket will have noticed that London and New York have posted solid gains this week despite oil hitting $48 a barrel. $50, the previous peak, is now seen as pretty much inevitable, and as such must be already priced into stocks. When oil hits $50 chances are it will rebound. With the war in Iraq now very much yesterday's story and removal of the oil price from the equation imminent, people will only have interest rates, the US elections and earnings to focus on. The latter has been exceeding expectations.

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hi SLEDGEY (hope you dont mind me calling you that)

ive no doubt that the stock market is due a bull run sometime in the near future. only thing is shares are just too volatile for some (i'm not saying i would NEVER dabble ...just a little though.) . take the link at the top of your post .....''the speculator''......sorry but not my idea of investing. you pays your money and you takes your risks.

yes equities may have technically outperformed property over the long run, but what about all the fallen heroes? cable and wireless, marconi, even more staples like glaxo, the list go's on. property is far, far more forgiving. if you bought at properties last peak in 89-91 you would now be sitting on a considerable gain. what if you bought marconi in 2000? what would you now be holding........a piece of A 4 and little else. even if your property burned down in a fire, and you were uninsured you would still be left with a highly valuable asset.....the land.

i'm surprised at you actually, after pulling me up yesterday , for not pointing out the risks about BTL, to the chap who wanted a good savings account. here you are 24 hours later suggesting the STR's stick it on the markets, without the same ''wealth warning'' you were right to pull me up, and i hope you think i'm right to pull you up. perhaps you've been highly successful with the equity market (good for you if you have).....however it is easy for us all to get carried away with our zest. (me included) i can only say to the STR's be careful if you go down this route. having a house with a crash value (assuming thats why you sold) would be far better than holding sheets of worthless paper.

every other month, there is some scandal or another associated with the market. whether it be the 'split cap's' fiasco or the 'shell scandal'. do you really know who even has your money? it sure is nice to hold all your own money, albeit in the form of equity and income.

i assume your graphs don't take account of gearing. which hardly shows property (in pure investment terms) in its true light. i'm sure if you re- did a graph and included say 90% gearing (and a similar timescale) i'm certain property would wipe the floor with equities, many times over. the average person buying equities will buy £100's worth with £100. the average person with property will buy £1000's worth with £100.

i know you can gear on shares as well, but at the end of the day , not to the extent you can with property, and really its only a credit line anyway (with shares)....a position that has to be backed up by your own money. over a descent timescale for the average (geared) person property is unbeatable.

regards BBB

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Over the long run, equities will thrash properties and every other type of investment, because they are wealth-generating. Every other investments - property, metals, cash etc - are not wealth generating and therefore *cannot* outperform the overall economic growth rate over the long run. Wealth is invested into these other assets classes from[/] the wealth creamed off economic growth - they do not create their own wealth, whereas companies do, and you can't invest more than the amount your economy grows by.

On average, property might earn you 5% a year over the long run (with the concept of dividends reinvested applied), while equities might get you 7%. Doesn't sounds like a spectacular difference year on year, but over a working lifetime, say 35-40 years, that extra few % compounded will make a spectacular difference.

BBB, you are right that shares are far more volatile than property. Looking at high/low data for even supposedly-stable FTSE 100 companies will show large % difference over the last 12 months. That is why it is crucial to hold a diversified portfolio. Anybody who invests seriously and has all their money in a handful of shares is just plain stupid. The people who stuck all their money on one high-performing tech fund or "invested" (ie gambled) it all in dotcoms are the same get rich quick gang who then piled into BTL.

To show how seriously getting it wrong in the short term can impact your future wealth, here is an illustration. If you invest £1000 in an asset expectingh 5% growth a year but it's price collapses by 50%, it will take 16 years at 10% growth just to get back to break even on your original expectation. How likely is it that your asset will outperform the market by double over 16 years? Buy a house now at your peril!

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Both are good assets over the long and short term but the essential point is to note is that to get good returns you need to be constantly trading your portfolio, regularly crystalising your gains.

This is especially true with property. I meet increasing numbers of people who say that they are in property 'for the long term'. This is fine. However when you ask them if they would ever sell any particular property the answer is an emphatic NO!!

This is a big mistake. One of the most basic rules of property portfolio management - and the way you make the REAL money out of it is to be constantly assessing your assets, identfiying where the gains have been made - and realising them. This releases the 'real' equity (as opposed to MEW) to reinvest in different property where you consider gains can be made. The same goes for stocks and shares.

As several people have pointed out on this site, simply holding a property in the long term only yields capital growth of around 2.5% - not a good return. (Im ignoring rental yields as it seems increasing numbers of investors are reliant on the above figure - I have met many at auction with no idea how to work out rental yield!!)

Simply amassing a large portfolio through MEW is not a sustainable business model, however it seems to be the primary methodology behind many of the property courses and investment schemes available. Having traded myself though the last recession, I was unfortunate enough to see many bankrupted by virtue of fast expansion using this method (albeit primarily in the commercial property arena, though the financing principles are broadly the same).

Judging from the postings I have seen on sites such as Singing Pig, just about all of these BTL's have only traded in good times, and appear to be completely unprepared for the consequences of a downturn in property and the economy in general (whether it happens or not).

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Equities outperform all other assets, including property, in the long run. However, as BB points out, the stock market overall and indivudal shares are more volatile than property. I suppose the downside with property is the high gearing, which of course people like BBB have benefitted from whilst property has done well, but if it goes the other way, the results can be devastating. The other disadvantage of property is the difficulty of diversification and the illiquidity of the asset.

For both assets classes one thing is true however: It is a big mistake to blindly buy on the basis that in the long term shares/property will always go up. I know this is the mantra peddled by financial advisors / property consultants, but buying at the wrong time can have disastrous results with either asset. TIMING IS IMPORTANT, because whilst property/shares may always go up in the long term, a person's life expectation is finite. Various articles and studies, which I do not have the time now to pull together and link to, have shown that if you buy at the wrong time, it can take up to 20 years to recover and this will reduce your lifetime wealth considerably. I personally believe that residental property in the UK will not reach April 2004 prices again in real terms for at least a generation (30-50 years), if ever.

In my view, now is a very bad time to buy property, and a reasonably good time to buy at least certain types of shares.

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The most important point I should have added is that it is NEVER a case of property or stocks/shares. A BALANCED portfolio is essential for spreading risk.

I disagree. The "balanced portfolio" mantra is peddled by the financial advisor and investment fund industry. With a balanced portfolio, you can only ever achieve average and mediocre returns, so you might as well just put all your money in cash and save all the charges on the unit trusts. The more you spread your investments the more you will average out your risks and returns and the higher your transaction cost will become. These costs diminish your returns to such an extent that it is better to simply invest in a nil transaction cost, almost zero risk, low return investment (i.e. cash or gilts)

You can only make above average returns with a bold strategy. In a way, this is what BBB has done, he decided to go for property and was lucky / got it right, depending on your viewpoint. The trouble with a bold strategy is of course that 1. it is higher risk and 2. it is hard to distinguish whether your success is down to luck or to your ability to identify successful investments. The holy grail of investing is to improve returns without increasing risk at the same rate.

A common fallacy, which with all due respect seems to have also befallen BBB to a certain extent, is that an investor has taken a bold, high risk-strategy and was successful by luck, but then infers that the success was down to his ability. In reality, the success is down to the combination of high-risk and luck, so if the investor, emboldened by his initial success continues to take high risks, some of the risks will inevitably materialise and lead to losses. One of my important investment rules is: "when you have been lucky, sell up and run with the money". This of course requires that you are able to recognise when you have been lucky, as opposed to thinking you are a great investor.

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I am talking to myself, but I did not want to continue the previous post, as I was already digressing. To emphasise the last point I made, three real life examples from myself:

1. In early 2004, I decided to buy some Jarvis shares. The shares had been beaten down to 130p on the back of bad news, and I (wrongly, as we now know) believed that the share price fall had been exaggerated and would eventually recover once the trouble was over. The very next week, Jarvis shot up to 170p, on no news, market sentiment had turned and the view now was that it was not as bad as previously believed. I could not believe my luck of having made 34% in one week and sold immediately, Jarvis now stand at around 40p

2. A couple of weeks ago, I put in a limit order for United Utilities at a price quite a bit below the then market price. UU. are not very volatile and the market price stubbornly remained where it was. One morning, I discovered that for some reason the price had briefly dipped below my limit in the first hour of trading and my order had gone through Menawhile the share price had returned to its previous level, already bagging me a 2% profit. Later that day, some good news came out and the shares went up another couple of percent. I could not believe my luck of having made 5% in one day and I sold the same day. UU. still hover around the same price at this time.

3. In 1998, I scrambled together all the cash I could muster for a deposit to buy a house in East London, because my rent was high and with a property bought on a mortgage my monthly outgoings would be much less. In the next 5 years, a property bubble developed in the UK and the value of my property almost doubled. I could not believe my luck of having being carried along on a property bubble and sold immediately after realising that the boom would not last much longer.

4. In June 2003, I invested some money in a fundraising for an OFEX listed company at 15p. After 3 months, the share price had doubled on no news, just improved sentiment. I held on, believing the shares would go even higher (sound familiar? - wait for the rest of the story, will sound even more familiar). The shares entrered a decline soon afterwards and now stand at 4p

The Moral: YOU MUST SELL, SELL, SELL WHEN YOU HAVE BEEN LUCKY.

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Hmm. I suppose it depends on what you mean by a "diversified portfolio", Bubble Pricker. I would say that you need shares in at least a dozen different companies, and preferably over 20-30, across several industry sectors. Anything less than that, IMVHO, is if placing your eggs in, if not one, then still too few baskets.

"Slowly but surely" is a good strategy when investing. On a portfolio of 20 different shares, it is still easily possible to beat the market average by just avoiding sectors that are clearly doing badly, and investing well in companies that are doing well.

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Agreed, you must not have too few shares. I was talking more about asset classes, but the diversification fallacy applies at every level. The conventional investment wisdown of having, say, one third in shares, one quarter in gilts and bonds, one quarter in property, simply does not make sense. Also note that cash does not seem to feature in this mantra. This is because financial advisers cannot earn comission or fees on cash.

Within an asset class, again too much diversification just pushes up your transaction cost and drives your returns towards average. How many shares is down to personal taste and size of portfolio. I would say 12-15.

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