We are living in interesting times. Property and share markets are all over the place, while investors try to figure out whether they should retreat to the perceived safety of cash. Now, cash is fine if you’ve got a two- or three-year term in mind, but over the long haul you will get much better returns from property and shares.

Furthermore, the bulk of the returns from these two asset classes come by way of capital gain, which is not taxed until you cash them in. This makes them far more tax effective than interest-bearing accounts.

The recent bad headlines have made many novice investors scared of shares, and I have been receiving emails asking if it’s a good idea to simply invest in an investment property – usually a unit.

That would be a terrible strategy. Consider the advantages shares have over property.

The first is liquidity. If you want to sell your shares all you have to do is call your broker and say “sell”. The money from the shares you choose to sell will probably be in your bank account within the week. Contrast this with the hassles of selling a property. Phone up three agents, receive a range of prices that may well be 20% apart, then wait until you find a willing and able buyer. You will probably find that it is worth at least 10% less than you hoped. At best – if you are lucky enough to find a buyer quickly and the contract doesn’t crash – you may have the money in your bank account within three months. And while you can always sell a small parcel of shares, if you’ve got a property you can’t sell just the back bedroom.

This lack of liquidity can be devastating for retirees. Let’s say you have an investment property worth $800,000 for which you paid $400,000 years ago. Even with the benefit of the 50% capital gains discount there will still be a taxable gain of $200,000 when you sell. This will take a huge chunk out of the proceeds. Contrast this with a couple who have the bulk of their investments in shares. Because they can sell a few now and then, as the years go by they need pay no capital gains tax at all because they can time the sales to stay in the zero tax bracket.

Whenever I discuss shares, a common reaction is: “I don’t know where to start.” The easiest option for the novice is to invest in quality managed funds, where the decisions are made by full-time professional fund managers. Alternatively, buy an index tracker fund. Simple. If the Australian market continues to do what it has done for the last hundred years, a reasonable expectation of return is 9% per annum long term.

If the Australian market continues to do what it has done for the last hundred years, a reasonable expectation of return is 9% per annum long term.

Shares have more potential for capital gain, because an increase in a particular share’s price should track increases in the company’s profits. As a growing company has the potential to increase its earnings by 20%, 40%, or even 100% in a year, so has its share price. Property can’t do this.

Provided you don’t get spooked when the market goes through one of its normal gyrations, shares are the simplest investment of all to manage. You won’t be called out of bed in the middle of the night to attend a burglary; you won’t have to go to court to evict recalcitrant tenants, and your budget won’t be shattered with huge bills for land tax, rates or repairs.

None of the foregoing is intended to denigrate the unique benefits of real estate. Money invested in shares can vanish overnight if the company goes down the gurgler, but a good block of land will last forever. This is why banks ask for a much lower deposit if you can offer property as security when you are seeking a loan. Furthermore, property does give you the opportunity to add value by rezoning or refurbishing – this is impossible with shares, where you are solely reliant on the skills of the company’s management.

In short, investors should aim to have both asset classes in their portfolio and make the effort to use the unique benefits of each. The rewards over the long term will astound you. But until you have enough money for both, focus on shares.


Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au