Noel Whittaker: How shares shine over property every time as a ‘hands-off’ investment with flexibility

I must confess, it has been a dull time for share investors, with prices falling across the board — here and overseas — as tariffs and the war in the Ukraine dominate the news. But as unsettling as it may be, we need to accept that volatility is the price we pay for the liquidity of shares. Keep in mind that over the past 120 years, the Australian All Ordinaries Index has delivered an average return of about 9 per cent a year, including both income and growth. There are good years and bad years, but history tells us that markets tend to produce six strong years and four weaker ones in every decade. The secret is to hang in there. Famous US investor Warren Buffett often uses a farm analogy to explain how investors should approach stock-market volatility. “If you owned a farm and your neighbour came by every day offering to buy it at wildly different prices, you wouldn’t sell it cheap just because he was in a bad mood, nor would you think it’s worth a fortune just because he’s overly excited one day.” Just this week, a reader wrote to me asking why I always seem to be writing about how good shares are and never mention investment property. In her view, shares are risky, whereas property provides a very stable portfolio. I can understand her thinking, but while it’s less volatile, in many ways, property is a far more challenging investment than shares. The key to success in property is buying an asset to which you can add value — typically through renovation or rezoning. And to maximise returns, you need to secure it at a price below market. I wouldn’t touch commercial real estate under any circumstances, because long vacancies are common and every lease negotiation involves discussions about rent-free periods and incentives. That leaves just residential property. You generally can’t add significant value to a single apartment, so that leaves houses. Given the strong demand from other investors, it’s difficult right now to find an undervalued property with value-add potential. Even if you’re lucky enough to do so, you’re then faced with hefty purchase costs, including stamp duty and transfer fees. Once you’ve bought the property, there are ongoing expenses — insurance, rates, land tax, maintenance — all of which eat into your returns. Then, when you want to sell, you have to list it with an agent or on a website and wait for a buyer with the funds. And the biggest problem? If you need cash, you can’t just sell the back bedroom: you have to sell the entire property, and if you make a good profit, it’s subject to capital gains tax in a single tax year. Now contrast this with shares. I’ve long recommended index funds such as STW, which invest in the top 200 Australian companies and have minimal fees to enter and exit. Ongoing fees are 0.05 per cent a year and the current annual yield is just under 4 per cent, mostly franked. This means the income is effectively tax-free for many investors. There’s no stressful search for the “right” investment: you simply buy it off the shelf, and you’re in. There are no ongoing costs, and if you have a $500,000 portfolio and need $50,000, you can sell a portion and have the funds in your account within five days. The liquidity of shares is also useful in estate planning. Remember, death does not trigger CGT – the liability passes to the beneficiaries, who pay CGT only when they sell. Think about two different investors, each with three children. One has a $900,000 investment property and the other has a $900,000 share portfolio. When the property owner dies, the property will most likely need to be sold, incurring CGT, to divide the proceeds among the children. But with shares, any beneficiaries who want to keep the shares can hold on to their portion, while those who prefer cash can sell their shares at any time that suits them. Shares are a more “hands-off” investment and offer flexibility that property never can. ASK THE EXPERT Q: My daughter and her husband are long-term renters with a young family, struggling to save for a deposit on a modest three-bedroom house in Canberra (estimated value $650,000–$700,000). They likely qualify for the Government’s help to buy scheme, but may find it hard to cover their share of the deposit, stamp duty and legal costs. My wife and I are considering withdrawing $30,000 from our $450,000 combined super balances to assist. We draw $1850 a fortnight from super and get $1470 fortnightly from Centrelink as part of the old-age pension. We also own our home outright. Are there any tax implications for my daughter or us if we gift her this amount? A: The money from super could be drawn tax free — you could think about a gift of $10,000 before June 30, and the balance as a loan. Then every July 1 for the next two years, another $10,000 could be forgiven and would cease to count as an asset for Centrelink. There are no tax implications. Noel Whittaker is the author of Wills, Death and Taxes Made Simple and other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions.