House or shares?

Anybody thinking about investing has to start with the big question: Should you put your money to work in a House or go for shares?

Are you a touchy feely kind of person, or are you strictly about the numbers? Do you like to see things with your own eyes or are you happy to read about them? Are you a control freak or are you content to hand over the reins to somebody else? These are the kinds of questions that might help you settle the house or shares conundrum.

A touchy feely, see-it-with-your-own-eyes kind of guy might just be happier with their money in bricks and mortar. You can go to see it, touch it and feel it at your leisure. In fact, if you are relying on capital gains to make your money, there’s nothing to stop you living in a house. And, in these times of work-from-home and online delivery, there’s nothing to stop you spending your every waking hour in the house of your choosing.

Without doubt, you control what you do with the house. You can decide what kinds of tenants to attract, how to decorate the property, how much of the day to day stuff to do yourself and how much you pay others to do for you.

And if you wanted, you could get just about everything done for you these days and limit your involvement to a couple of keyboard clicks per month, which, by the way, is pretty much what you are aiming for with shares.

That’s to say the kind of control you get with shares is going to be limited to infrequent what and when to buy and the odd when to sell. Of course there are people who do more, but the more you read about investing the more you will understand that most people’s investments should be limited to a global index tracker and some government bonds.

So when I think about a house or shares in terms of what kind of investor should invest in each, I’m thinking more along the lines of those with authoritarian tendencies for a house, and those with a more passive nature for shares.

Of course, even the most authoritarian among us, might just settle for a little less control if they were incentivised accordingly. Perhaps, bigger investment returns might fit the bill here.

And on paper (in Triumph of the Optimists) shares certainly look like a good bet in that regard because historically the global variety have returned in the region of 5% above inflation, compared to less than 2% for UK property. But the picture gets muddied a little when you take leverage into account i.e. borrowing money, which for houses is relatively easy to get, and relatively cheap to borrow.

With shares, not so much. Brokers do lend you money to invest if you want it, but the terms are nowhere near as favourable, the amount is nowhere near as much, and the risks of getting yourself into trouble are nowhere near as unlikely!

And just in case you’re still not sure what leverage can do for you. Imagine Bob invests £100,000 and house prices go up 10%. If he sold his house he’d have £110,000. He’d have made a cool 10K. But imagine Terry also invests £100,000 but he takes out a £300,000 mortgage from the bank, and his house also goes up 10%. If Terry sold, after returning the £300,000 to the bank he’d have £140,000. He’d have made a much cooler 40K i.e. 4 times as much as Bob but with the same starting amount.

I’ll be the first to admit those calculations are simplified a bit, and don’t take fees and taxes into account which probably do a little damage to Bob’s returns but you get the picture. Leverage can juice returns. Of course it can juice losses if you are unlucky, but for most people with a long term time horizon, the likelihood is, the positive story is more likely.

The bottom line is leverage evens out the playing field, but it also becomes another factor in whether or not property investing is right for you, because, what I’m really saying here is:

“If you want to make good returns through property you are probably going to need to borrow money to invest,”

…….and for some investors, that changes the game.

Because, let’s face it, we are unlikely to be talking about trivial amounts here. Last I looked, the average house price in the UK was over £200,000, which means you be looking to borrow £150,000 with a 75% loan to value mortgage.

And if you are the kind of person who feels debt is a burden, investing in houses, starts to make less sense. On top of that, there’s the not so trivial fact, that for our example £200,000 house, we’d need to put down a £50,0000 deposit, which for a lot of people just ain’t going to be possible. Shares on the other hand can be easily bought with pennies. In other words, just about anybody, with just about any amount of money, no matter how small, can buy shares these days.

Of course the easiness of buying shares can lead some people into trouble. The old saying that ‘a little bit of knowledge is dangerous,’ holds true in stock markets with gusto if you’re not disciplined with yourself.

Many an investor has lost money through ease of transactions when they shouldn’t i.e. they panic sell when they think the markets are going down, and panic-buy when they think the markets are going up, only for the opposite to happen in each case.

The fact that it can take months to buy or sell houses tends to but the kibosh on similar stupidity in the housing market (although some people manage it)! That’s not to say, some investors aren’t going to think taking months to get your invested money is a major disadvantage.

And there’s also the not so trivial matter of concentration risk. If something goes wrong in the property market you’ll could be hit hard. Many people mistakenly think investing in different kinds of properties in different cities is all the protection they are ever going to need.

But when you think about it, impacts on the housing market, often take a national, if not global form, so even if you spread your properties over multiple cities and property types, another Brexit or Corona virus might impact them all equally.

And contrast this against an investment portfolio of global shares and government bonds, where you are invested across thousands of companies across the globe. When Shell and HSBC start struggling, Alibaba and Apple more than make up for the losses, and even during those rare and unfortunate (and up to now always temporary times) all the shares across the globe go down together, government bonds should go up in value and save you.

So when considering whether a house or shares is the better destination for your savings, I’d be more inclined to point you towards shares, that is, unless you are a touchy feely, bossy boots type, that isn’t afraid of debt, and has a large chunk of change for a deposit.