Stocks v property Which will give you better returns?

Straits Times: Sun, Jan 22

Retail investors, especially those in Singapore, tend to think of stocks as a short- to medium-term investment. When seeking a long-term investment, most Singaporean investors think of property first. But a recent comparison done by the Singapore Exchange (SGX) has shown that, in fact, local stocks have outperformed private residential property over the long run. In the 10 years from 2001 to 2010, the benchmark Straits Times Index (STI) gave an annualised return on investment of 4.9 per cent. Meanwhile, if you had bought property in 2001 and sold it in 2010, you would have made an annualised return on investment of 3.9 per cent over the period. Over this decade, the STI also outperformed Singapore Government (SGS) bonds, which delivered annualised returns of 4.1 per cent. The study showed that, contrary to popular belief, property has delivered stronger returns than stocks only within shorter timeframes. In 2010, for example, the STI rose 10.1 per cent, while property prices shot up by 17.6 per cent. In the three years from 2008 to 2010, property still outperformed stocks, delivering returns of 4.5 per cent a year on average, while the STI dropped 2.7 per cent on average each year. In the five-year period from 2006 to 2010, you would have made a healthy 6.9 per cent annualised return from investing in the STI stocks, but you would have been even happier if you had invested in property, where prices rose 10.5 per cent a year on average. Nonetheless, stocks still trump property when one zooms out to take in a picture of the last decade. 'Many are not aware that the annualised return on the STI, excluding dividends, was actually higher at 4.9 per cent, while the return on property was 3.9 per cent (excluding rental, maintenance fees and taxes) for the 10-year period of 2001 till 2010,' said SGX head of securities Nels Friets. In fact, he said, many studies have shown that, regardless of how the property market fares, stocks generally make for a good long- term investment. 'Generally, over the long term, equities tend to beat the inflation rate and give more returns than bonds, and bonds a higher return than cash.' Unlike property, stocks are very liquid, and can be bought and sold easily, Mr Friets added. Furthermore, they require a much smaller upfront investment. At today's prices, an investor could buy one lot of an STI component stock for less than $5,000. The downpayment for a property, meanwhile, generally tends to run into the tens, if not the hundreds, of thousands of dollars. However, some veteran investors note that it might not always be practical to invest in stocks for such a long period. An unfair comparison For starters, International Property Advisor chief executive Ku Swee Yong argues that is unfair to compare the performance of the STI against the property market within an arbitrary period of time. The year 2001 was an unusually bad one for global stock markets, as they were battered first by the bursting of the dot.com bubble and then the Sept 11 attacks in the US. By starting the study from 2001, the STI is given a low base to rise from, Mr Ku said. Furthermore, the study might yield a different result if it included the income an investor would have earned from rental and dividend yields, he added. 'In Singapore, you would generally earn 3 to 6 per cent rental yield annually, depending on what type of property you have,' he noted. 'Among the STI stocks, some of them pay very poor dividends. If you add up all the dividends they paid during that period, and compare that against the rental yields, perhaps the overall returns of stocks versus property would look different.' Volatility is a big issue 'There's one big difference between stocks and property: No matter what, a piece of property will always have value,' said 33-year-old investor Getty Goh. Mr Goh began investing in property at the age of 24, and started buying stocks three years later. Today, he runs his own real estate consultancy Ascendant Assets. 'There was one day I remember when the value of my stocks suddenly dropped by $3,000 to $4,000 because the market had turned downwards sharply,' he recalled. Mr Vasu Menon, OCBC Bank's head of content and research, noted that such wild swings in the stock market are even more prevalent today. As a result, he said, holding on to stocks for the long term is no longer a relevant strategy in this day and age. 'The world has changed completely since the collapse of Lehman Brothers in 2007,' he said, referring to the Wall Street investment bank, whose collapse led to stock markets crashing all over the world. 'I have never seen so much uncertainty in the 23 years of my investment career as we face now. And the problems that are causing this uncertainty, such as the ones in Europe, are structural ones, which will take years to resolve.' So even if stocks had outperformed property between 2001 and 2010, he said, there is no guarantee that they will do the same over the next decade. His advice: Set a target for your stock investments and have the discipline to stick to it. Say, for example, that you hope to make a 30 per cent return on a certain stock within three years. If the stock somehow reaches that 30 per cent target within six months, just sell, Mr Menon said. 'It's typical of many Asian investors - when they buy a stock and it goes up, they get greedy and wait in the hopes that they can reap even more,' he said. 'Eventually, it turns south and then they find it even more difficult to sell, because they hope it will rebound.' Cash outlay v returns Mr Goh noted that to achieve the same amount of absolute returns, one would have to fork out a bigger sum of cash for stocks than for property. With a property, an investor could get a bank loan for up to 80 per cent of the value of the unit. If the unit costs $500,000, he would need to put down a cash deposit of only $100,000. If the value of the property goes up by 5 per cent and he sells it, he makes $25,000. If he had put the same amount of cash - $100,000 - into the stock market and the value of that basket of stocks rose by 5 per cent, he would have made only $5,000. 'If I had $1 million in cash to play around with, then yes, I would leave it in the stock market for a long time,' Mr Goh said. 'But most small investors don't have that much cash lying around. They would have $100,000 or $200,000 and it makes more sense to put it to work on a property instead.' One could use leverage when buying stocks too, but he noted that this is a high-risk strategy. 'With a property loan, you pay for it in steady monthly instalments. But if the stock market suddenly turns south and there is a margin call on your account, you might have to pay a big sum immediately.' When an investor trades using leverage, he would have what is called a margin trading account, in which cash is kept. In the event that his stock falls in value, the brokerage would take money from that account to make up for the loss. If the balance in the account falls below a minimum requirement, the brokerage would make a margin call, and the investor would have to top up the account. Otherwise, his investment would be sold off. The bottom line All of this is not to say that stocks are a better investment than property, or vice versa. 'Property is probably still the top choice for long-term wealth preservation and growth, however it should always be part of a bundle of investments,' said Mr Ku. 'There should always be some diversification.' Mr Goh agreed. 'Both stocks and property can be long-term or speculative investments. It really depends on your risk profile, your needs and how much cash you have on hand.' [e-mail] Bundle of investment "property is probably still the top choice for long-term wealth preservation and growth. How ever, it should always be part and bundle of investments. There should always be some diversification." INTERNATIONAL PROPERTY ADVISOR CHIEF EXECUTIVE KU SWEE YONG Decide based on risk profile, needs, cash "Both stocks and property can be long-term or speculative investments. It really depends on your risk profile, your needs and how much cash you have on hand." INVESTOR GETTY GOH Source: The Straits Times