Is it Better to invest in Property or Stock Market?
We have discussed personal financial management in the past on this site a lot. We have been through the four elements of personal financial management, which are namely
We have gone over almost all of these elements in our past blogs. In this article we are going to focus on investment. Saving up money is only one part, you also need to invest your hard earned savings into profitable investment options.
Investing the savings, allows your savings to generate money on their own. This can be termed as passive or portfolio income, depending on how you invest your savings. In this article we are going to discuss two of the most common investment categories
- Investing in property or real estate
- Investing in the stock market
Before we get started, let us first emphasise the importance of having a diversified portfolio. No matter what you invest into, your investment is always going to be exposed to a certain degree of risk. This is called the market risk, which means that in case the markets crash, your investment is going to suffer. There is no way to minimise market risk but the other type of risk, that is called “unsystematic risk” can be minimised.
Unsystematic risk is the risk pertaining to any particular class of assets or investment. Unsystematic risk can be minimised by diversification. This is why seasoned investors do not keep all of their investments in a single asset or category. For instance Amazon is probably the best performing company right now, so why haven’t investors invested everything they have into Amazon? Simply because doing so would be very dangerous.
Investment in Property
Investment into property or real estate is perhaps the most common method of investment that people can think of. Yes investment into shares is also common but property is something that people think of first. Particularly in South Asian countries, where the population density is high and therefore demand for property is high as well.
Australia is a sparsely populated country so the notion of investment into property may not be the same as South Asia here but investment into property is still a major asset class.
There are both pros and cons when you consider investing into property. Firstly you must decide how you want to invest into property, as there are a number of ways in which you can do so.
- Buy rental property
- Buy property and sell it
- Buy property, renovate it and then sell it
Also See: Is The World Going To End in 2020?
Buying rental property is a sure shot way of getting an alternate income stream. As lucrative as it may sound, buying rental property is not a suitable option for everyone. Firstly buying rental property requires a lot of capital and savings to start off with. Assuming that you already live in a house which has been paid off, you can either buy a second rental property on cash (unlikely) or take out a mortgage. In both cases you must have enough cashflow at hand to make the mortgage payments without inconvenience.
Next thing to consider is that as a rental property owner you will be responsible for not only the mortgage but also the insurance and carrying out maintenance to keep the property in healthy livable conditions. This can take quite some time out of your timetable, which is why many rental property owners hire property managers to do this for themself. Hiring a property manager however will simply add on more to the cost.
If the above mentioned considerations do not matter much for you, then you should go for it. Invest your savings into a rental property as this is going to create monthly rental income for you. Not many however can be in a privileged position to do so, therefore carefully weigh out your options.
Buy and Sell
Another option is to simply buy and sell property. How this works out is that you buy property when it is available for a lost cost and then sell it once it goes through price appreciation. Many people make a fortune out of it but it very greatly depends on the real estate market.
For instance prior to 2020, the real estate sector across the globe was doing really well, you could buy a property and sell it six months later for a profit but the pandemic has dented the growth of the real estate sector.
Another issue with buying and selling is that your investment gets stuck for a few months, it is not a very liquid form of investment. Furthermore, under current circumstances, there is no guarantee for a profit!
Buy, Renovate and Sell!
Another very interesting option is to buy a property for a low cost, renovate it and then sell it for a profit. Many house flippers do this to earn a living. You can buy a low cost property, for instance an old broken down property and then use your skills to renovate it and then sell it for a profit.
Once again it is important to remember that you can only flip 3-4 houses at maximum in a year. In addition to this you need to have a really good eye to spot low valued properties. This is something that can only come with either experience or in depth knowledge of the market.
Investing in the Stock Market
Investing your savings in the stock market is a very easy investment option, it is also the most preferable option if you do not have a large amount of savings. You need thousands of dollars to buy a property but only a few hundred dollars to invest in shares.
Investing your savings into the stock market is very easy as compared to investing into real estate. You simply have to open a brokerage account and then you are good to go. Trading however requires at least some level of knowledge about the way the market works. If you do not have any idea about how the market works, then it is advised to take the help of an investment advisor.
With shares you can earn in two ways. Shares carry annual dividends, so if you invest into the shares of a company that pays annual dividends, then this will be your income stream through the shares.
Similarly shares go through value appreciation and depreciation. They can go up and down in value, when shares go up in value, the total value of your investment also goes up and thus you can cash out if you want to realize the profit you have made. For instance if you buy 100 shares of a company at $10 each, that`s total investment of $1000. If after a month the shares of that company rise to $15 per share, then your investment stands at $1500 in just one month. You can at this point cash out and realize the $500 profit. Or you can wait and see if the price increases further.
Shares can give a lot of profit if you know how and when to invest. If you are a beginner, you can play it safe by investing into index funds. In this way you do not have to scope out profitable companies, instead simply invest into the index fund that tracks your preferred stock market. For instance if any index fund tracks the ASX, then that fund will have its portfolio that reflects the portfolio of ASX.
In this manner, you will make profit when the ASX makes profit and loss when the market makes a loss. This is a well known passive investment strategy that beginners can adopt while they are learning how the market works.
The bottom line is that you should invest in whatever you feel comfortable. If you have got good property flipping skills then that`s what you should go for. If you have deep knowledge of the market, then invest in shares. Whatever you do, remember to not put all of your eggs into one basket. Remember to diversify in order to minimise the risk of loss.
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