Which is the best investment – shares or residential property? It’s a question that enthrals most Australian investors, with many vehemently liking one, but not the other, and lots of people putting most if not all their investment eggs into just one of these asset baskets.
There are also many investors who like diversifying into both shares and residential property and, as the latest ASX/Russell Investments Long-term Investing Report reveals, with good reason. Both asset classes have performed strongly over the last 10 and 20 years to end 2013, especially when tax is taken into the equation.
Over the 10 year period to 31 December 2013, before tax, the ASX/Russell report shows Australian shares (including growth and dividends) returned an average 9.2% per annum, compared to residential property returning 6.1%.
Over the 20 years to end 2013, the outcome is reversed. During this period Australian shares averaged 8.7% p.a. against annual average returns from residential property of 9.9%.
Bring tax into the frame and the picture changes again.
For those on the lowest tax rate, over the last 10 years the after-tax returns from Australian shares averaged 9.4% p.a., while for those on the highest tax rate the return was 7.1%. Residential property investors on the lowest tax rate enjoyed after-tax returns of 5.4%, while those on the highest tax rate received an average of 4.2% p.a. from their property holdings during the decade.
Over the last 20 years to end 2013, those on the lowest marginal tax rate received average annual after-tax residential property returns of 9.0%, just pipping Australian share after-tax returns of 8.9% for low tax payers. Tax payers on the highest marginal tax rates received after-tax returns from Australian shares of 6.9% p.a., while property investors in this tax bracket received after-tax returns of 7.5% p.a.
Chairman of the Australian Government Financial Literacy Board, Paul Clitheroe said, “This study confirms yet again the value of investing in growth assets like shares and property. Sure, the market for both assets can, and does, experience short term falls, and that’s why they should be seen as long term investments. Ideally, any shares or property should be held for around ten years to even out the market highs and lows.
“Some people do well holding just shares or property, however I like diversification and invest in both – and that’s what I would advise most people to do”.