I received a similar type of question from time to time, repeatedly. Through my blog and through my mailing list, many readers ask about the best place to put their money. I think you probably have the same type of question popping into your mind right now.
Should you follow the herd into the latest gold rush? It seems like silver is the next precious metal that’s catching up on the appreciation on most commodities. Is unit trust worth investing? What stocks should you buy now? Isn’t borrowing money to buy a property considered a dangerous venture? There are also questions about some new types of fancy investment scheme like swiftlet farming, palm oil plantation lot, or land banking.
My philosophy is simple. Most rich people got rich really quick by involving directly in businesses. Of course I don’t expect that you must be an entrepreneur to accumulate wealth, because becoming a successful entrepreneur requires not only leadership and communication skill, but also the most important of all – massive amount of action to implement the business plan.
So where else can you get great return, if not from direct involvement in business? There are two very common and proven investment choices: stocks and properties. If you are still not master investors in these two categories, you shouldn’t even bother about all the other schemes. The proof is obvious. Most affluent people either have a lot of shares of great companies, or a lot of real estate properties, or BOTH.
Which one is better?
Asking which investment is better is like asking whether a BMW is more superior to a Mercedes Benz. There really isn’t an answer but I would guide you to choose the one that’s more suitable to your personality, preferences and style, towards the end of this article.
Pros and Cons of Property Investment?
When you are buying a property, which may be a unit of a high-rise condominium, or a commercial shop lot, you are getting something very tangible. It is real in a sense that you can see it, touch it, smell it or even live in it.
Since a property cost a lot more than a unit of public-listed company share, you may find it hard to come up with the investment capital to even commit the down payment. But banks are more than welcome to lend you the rest of the money you need, as long as you have a stable income. Banks are not only betting on your ability to pay back the debt, they are also confident that the price of properties is stable and will appreciate over the long term. If you can’t pay back someday, banks are still able to recoup their losses by auctioning off your property.
This fact alone provides the greatest advantage of leveraging effect. You practically own a big piece of property just by paying as little as 10% of the property market value. When the property appreciate 10% in value, you are getting a 100% return on your 10% capital, based on the simple calculation of omitting all other related costs.
But at the time your investment property is not performing, as you want it to be, it is sucking money out of your pocket every month. It needs a lot of maintenance such as mortgage payment, utilities, and taxes. In other words, it would be like a cancer tumour that may get even bigger and at one point, it would threaten your financial survival.
Of course there are other pros and cons but it would make up a whole book if I keep on elaborating this. Let’s look at what’s offered in the stock market.
Pros and Cons of Stocks
Stock investment is so liquid. You can basically move your money from company A to company B within a few days by trading the shares. When you buy a stock of a company, you are basically investing in the management of the company, and expecting that these executives will make the company operation profitable in the coming years. Unlike investing in properties, you don’t have to be actively involved in managing what you’ve bought.
Last time, owning a share of a company means you’ll at least get a piece of paper, which is the certificate of ownership. But now, it is all done electronically. The company and business are there. It is real but you just don’t really see it. It doesn’t give you much control over the company assets and operation because you are simply giving the power to the management team to carry on their job. You are allow to cast a vote in the Annual General Meeting, but without owning majority of the company’s share, you don’t have the influence to change much of the decision. It really sounds like a more passive type of investment where you can sit and wait for your fat dividends cheques.
Now come the biggest problem of investing in stock – the roller-coaster type of price movement easily disturbs most investors. The price of stocks can experience extreme fluctuations in the short-terms, which make most investors feel uncomfortable. Without strong emotional intelligence and discipline, majority of stock investors made the wrong decision, usually at the wrong time.
Nevertheless, master investors can navigate through storm and get a very handsome return year after year, as much as over 25% per annum. The world’s richest investor, Warren Buffett for many decades, demonstrates this.
So both investments presents its respective advantages and disadvantages. The question should be boiled down to “Which one is right for you?”
Your preferred investment
Through my experience investing in both asset class, and also from the sharing of other experts in both fields, I had summarized the following for you to pick your preference.
- Prefer to read company financial reports at home, rather than driving around to hunt for a property for sale
- Prefer to sit back and let the management team operate a business, rather than managing your tenants
- Prefer to make buy and sell transactions through computers or a simple phone call, rather than going through several times of negotiations
Then, stock is definitely your first choice of investment.
But if you:
- Enjoy talking to different professionals like real estate agents, properties buyer and seller, tenants, bankers, contractors, lawyers and developers
- Want to invest in assets that give you a lot of control such as making changes on the properties and even choosing the people you want to work with
- Are comfortable owing banks a lot of money and are making sure that there will be other people paying your loan for you
Then, real estate is certainly your cup of tea.