The inherent differences between property and share investments
There’s a fundamental difference between investing in shares and property, a reader says in an email.
“With a stock there is always the risk of bankruptcy of the entity you invest in, and the investment you make becoming worthless,” he writes.
“For anyone who invested in the likes of Chase Corp, Judge Corp, Equiticorp and any other corp you can think of in the late 80s, the risk is very real. More recently, think of just about any tech stock apart from Provenco.” Property, on the other hand, doesn’t become worthless.
That’s quite true. But there’s another important difference, too. It’s easy to invest in many shares at once, via a share fund. It’s much harder to do that with rental property, which is the way most New Zealanders invest in property.
In a good share fund, while a few of the fund’s shares might become worthless, there’s virtually no chance the whole fund will.
Note, though, that I did say a “good” fund. Luckily, there was no fund in the 80s that invested only in the “corps” that became corpses. There were, though, 1990s funds that concentrated on tech shares, which soared and then plunged.
I’m not talking about those sorts of funds, which concentrate on one type of share. The very point of share funds is diversification. A good fund spreads its investments across many industries, and also preferably companies of different sizes.
If you invest in such a fund, over the long term the poor performance of some shares will be outweighed by the good performance of others.
The reader emailed after I said in my last column that it’s quite possible to borrow to invest in shares, as well as property, thus using gearing to boost both risk and expected return.
His response to that: “Companies themselves are geared.” So, if you borrow to invest in shares, “you have double gearing I suppose. That is why investing in shares doesn’t afford you the same gearing opportunities as investing in property. Your risks in the share market for disaster are greater.”
There’s some truth in this, too. The 80s “corpses” were highly geared. When euphoric investors borrowed to invest in them, it was double gearing with a vengeance. Some people ended up with not only worthless shares but also debts.
These days, companies listed on the stock exchange are much less heavily geared.
Nevertheless, they probably all do some borrowing. This helps to explain why shares are riskier than property.
Still, there ARE opportunities for gearing in shares. It’s just that it pays to be subtler than with property.
A lightly geared share fund investment can be similar, in terms of risk and return, to a heavily geared investment in a single property.
One more point — about another fundamental difference between shares and property. With shares, the reader writes, “You are relying on the managers of the business.”
With a rental, the manager is either you or a person you hire. You have much more control, and that appeals to many investors. On the other hand, you also have to put in much more time and worry, or else sacrifice some of your return by paying a manager to do it for you.
In a share fund, you have no say, but also no responsibility.
In the end, I guess, those who have faith that most company managers will do a reasonable job — and who would rather invest simply and go to the beach — will invest in share funds. Some risk lovers might even gear such an investment.
Other types will probably always stick to property.
Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.