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Money makeover, day eight – shares or property?

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by Peter Switzer

In Friday’s installment of my 12-part money makeover series, I looked at ways to build your wealth using good old bricks and mortar. Now I want to put the spotlight on this asset’s mortal enemy — shares!

The eternal battle

In stockbroker or financial adviser circles, there’s an age-old battle between which asset class is the best to make yourself richer.

I have studied Aussie property and shares relying on work done by Rob Cornish at Macquarie Bank and in a head-to-head battle over five-, 10-, 15- and 20-year periods, both asset classes returned 10 to 12 per cent, on average, per year, over these time periods.

Sometimes shares won but, other times, property did.

The dark side of property

The critics on both sides, especially shares, always like to point out the problems with property.

These include:

Tenants’ issues
Agents’ issues
Maintenance
Rates
Insurance.

The dark side of shares

On the other hand, houses don’t disappear as easily as Babcock & Brown shares. Your rental property does not lose 50 per cent in value or more as shares did in 2008-09.

The bright side of bricks and mortar

The best argument for property being better than shares is given to you by the banks. Simply put, you can borrow more from a bank for property than you can for shares.

Okay, property is safer but it might not give you better returns.

Switzer’s view

I like both assets and I hold both. When I was young, I was big on bricks and mortar and did well but I wish I had bought BHP-Billiton at $10 or even lower.

Similarly, CBA when it was in single-digit figures was a sensational buy and asset to hold.

My preference for novice share players is to encourage them to buy great name companies that have a history of paying dividends. In fact, half of the long-run return from shares comes from dividends and that’s why I like holding lots of shares that cough up solid dividends.

The dogs strategy

The Yanks have a cute share buying strategy called the ‘Dogs of the Dow’. I was reminded of these as I am writing this piece from New York, where I am catching up with the guys from Fox Business.
These are the 10 highest yielding stocks in the Dow Jones Index, which only has 30 stocks, but they are the top 30 stocks in the country.

The theory suggests that as dividends are more stable than stock prices, a high dividend yield says a stock is near the bottom of its business cycle and the share price is down but will soon head up.

An equal amount of money is put into each of the 10 stocks.

There are variations on this ‘Dog’ play but this will do for now.

By the way, the strategy has not worked in the past couple of years but it has done pretty well in the past.

What shares do you buy?

In terms of what shares to buy, you can get a stockbroker to make you a portfolio which will reflect your appetite for risk. You could get a model portfolio from websites such as CommSec or you could buy an ETF (or electronic traded fund) that approximates the S&P/ASX 200.

So, if the market is up two per cent, your investment is up very close to that as well.

Some people might buy the top 20 stocks or the top 20 dividend paying stocks and just hold them, no matter what. These all have their critics and supporters but most of them are better than picking stocks on a hunch, a newspaper article or a tip from a mate.

In most portfolios of assets put together by advisers, shares usually attract 60 to 75 per cent of the money, property might get 15 to 20 per cent and cash or fixed interest the leftover bits.

Some critics say advisers, however, are biased towards shares because it’s easier for them to make more money out of recommending shares than property.

Shares are a good investment if you buy quality, and play the waiting game.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

Published on: Monday, January 04, 2010