Choosing the type of investment to make really depends on your own personal circumstances. Your financial goals, risk tolerance and investment horizon.
However, I find that in Australia SO many people are focused on real estate investment. While I think real estate has several benefits such as providing tax breaks and is less volatile, I’d like to offer a different perspective. Stock market investment can be a much better investment and here are three reasons why.
1. Freedom. Real estate is one of the least liquid investments out there. It is a lengthy process to buy a home and even more of a process to sell one. It often requires a mortgage which means you commit to a large, fixed expense every month. Having a stable income is imperative and losing your job could land you in a sticky situation.
As a “single” 20-something investor that doesn’t know what the future holds, I don’t want to be stuck in an obligation. By investing my money in the stock market instead of real estate, I can buy and sell my shares online with ease. I will keep receiving capital gains and dividends without worrying about tenant occupancy, house repairs, agent fees. If I lose my job, I can sell off a small part of my portfolio to get the funds I need instead of having to sell the entire thing. If I decide I want to move overseas, my online shares simply come with me.
2. Diversification. Investing in real estate means investing in one type of asset – Australian, residential real estate. However, with the stock market you can invest your money in hundreds of different companies, industries and even countries.
Why is this important? Well, diversification is a risk management strategy. Different asset classes have different economic cycles, perhaps when real estate is making stronger returns, the stock market may not be performing as well. By diversifying your money across different investments, you’ll be reducing volatility and hence maximising your returns.
3. Accessibility. Let’s be real. To invest in real estate, you need a lot of money. Whereas, you can invest in the stock market with as little as $500 or even lower for micro-investing platforms. You can start generating wealth early and do not need to wait until you save up for a deposit.
The average home in Melbourne is around $855,428*. To put together a recommended deposit of 20% would require someone to save $171,085. The average salary in Melbourne is $70,000*. This means that an individual would have to save 20% of their average after-tax income for 15.5 years before they can afford a recommended deposit on an average home. This makes real estate significantly less accessible. Not only is it hard to save regularly for 15.5 years but it doesn’t include opportunity cost and inflation.
If this same average individual invested this money in the stock market instead of saving for a home deposit they would have $365,546* instead of $171,085 like the home deposit saver.
*Sources: Domain State of the Market report September 2019, Payscale, Average Salary in Melbourne March 2020, Australia. 9% annual rate of return used for future investment predictions