Is the stock market, as a whole, an inherently riskier place to invest money than the residential property market? Now, I am not for one second suggesting that either is an appropriate place to put your money, although one or both may be, I am just opening up the discussion. I am also considering the property market in investment terms rather than housing terms, no share portfolio will keep you dry through the winter or give you somewhere to show off your latest plasma TV. These thoughts are probably, therefore most applicable to excess property investment, by which I mean a second property, a buy-to-let property or a house larger than your requirements, which you hope to sell to fund your retirement.
Firstly, what do we mean by risk? It is, I suggest, unlikely that the stock market or the property market will drop in value to zero. It is, of course, possible to make a bad choice of investment. Some companies will go bust and some properties may become worthless, perhaps because of flooding or encroachment by the sea. Now, you would be daft to buy a property without insuring it against these risks but most people will buy a share in a company without any corresponding insurance against loss (i may cover how another time). This, then, starts to colour our view of the relative merits of the investments; we take more risk with our stocks, for some reason, than we do with our real estate.
The world of professional investors usually expresses risk in terms of the volatility of returns. An investment which can deliver high returns with periodic big drops in values is considered to be riskier than an investment which is more steady in its delivery, even if they end up at the same spot.
So, how does volatility compare? My main concern here is one of information delivery. If you valued your share portfolio every year, it may not look particularly volatile and, indeed, in most years it would have gone up in value, probably even in 1987. This is where the stock portfolio is at something of a disadvantage when compared against property. You see, property is not valued by anyone, let alone the market (as distinctly opposed to an estate agent or even a surveyor) in anything like real time. Depending on how often we move, a property may only be market valued, i.e. bought, once every seven years. We may read in the press about the general sentiment but no one is able to rub our noses in its value in real time, minute by minute. If you own a stock portfolio, you can watch it go up and down every minute of the working day, responding instantaneously to investor sentiment, and it can be frightening for some.
Also, I have referred to a stock portfolio as opposed to one stock, mostly, as it would not be rational to hold only a couple of different shares. Diversification is easy with shares, not so with property as it is expensive and slow to sell, amongst other things.
What of the returns? Well, ignoring income form dividends or rent, which I gauge to be similar after costs, I think property and equities have probably delivered similar capital growth. If you take into account transaction costs and the difficulties of diversifying across a number of properties, it may well be that a property portfolio has lost ground to a share portfolio. What, though, will the next twenty bring?
