Money: Spread your risk over long term plan
I WOULD love a dollar for each time I have been asked, "Should I invest in property or shares?". And on the basis of past returns, residential property would seem to be the frontrunner, with 20-year average annual returns of 10.2 per cent - the highest of any mainstream asset class.
But that doesn't necessarily mean bricks and mortar is the right investment for you.
The latest ASX/Russell Long Term Investing Report shows that over the 20 years to December 2017, Australian shares notched up average annual gains (before tax) of 8.8 per cent and international shares (hedged) delivered gains averaging 7.4 per cent. It goes to show that a decent portfolio of shares, or a well-located property, should both provide decent long term investment returns.
Bear in mind, past returns can't be used as a guide for the future. That's because investment markets move in cycles. Already, for instance, we've seen property values cooling in Sydney and Melbourne.
That's why I recommend spreading your risk. If you own shares, think about property, and vice versa. The important thing is to do plenty of research, don't get ripped off by spivs, and use good old commonsense. That is, invest for the long term, and don't over-borrow. And no, long term is not a week. For me, it is over a decade and preferably longer.
In some years shares will outperform property. At other times, property will forge ahead. But our population is growing strongly so over the long term a well-located property should do well, and it is the same for a decent portfolio of shares.
The key is to invest in a way that you feel comfortable with. I own a home and some investment property, so I have enough exposure there. What appeals to me about shares is that I can build a diversified portfolio with a small amount of money. I also love the liquidity of shares and the fact that I don't have to take on a major debt to invest.
As an investor, you can hold shares directly or indirectly through a managed fund. One of the advantages of using a fund is that it reduces our tendency to over-react to short term market movements. We often buy when prices are high and sell in a hurry when they are low - which is exactly the opposite of what we should do!
The main thing is to stick to a long term plan. The ASX report pointed out that an investor, who repeatedly switched between investments chasing the previous year's top performer, would have been 29 per cent worse off over the past 20 years than if they had invested in a balanced managed fund with exposure to all the major asset classes.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.