Paul's Insights: Super, Property or Shares
Paul answers one of the most frequently asked questions - should you invest in super, property or shares?
Chairman's Update – June 2018
I would love a dollar for each time I have been asked, "Should I invest in super, property or shares?”.
In fact, this would see me with so many dollars that I wouldn't need to worry about investing at all. But it is a good question.
The good news is that we can start off by simplifying things by eliminating super as an investment option. “What!” I hear you saying. “Super has to be the best investment".
Super really is ‘super’, but it is not an investment. It is a tax structure which we can use to hold investments. Let's tackle this first.
Super is pretty well understood these days, but to recap, we workers can put up to $25,000 into super as salary sacrifice, or if you are in the position to do so, probably as a self-employed person, as a tax deductible contribution. Forget investing for the moment, we’ll come to that.
The really big deal here is, you will only be taxed at 15 per cent on that amount.
Our personal tax rates are pretty high. Including the Medicare levy, if you earn above $37,000 you pay around 34.5 per cent tax on each dollar above that. Above $87,000, you pay 39 per cent. And if you earn above $180,000, tax is a chunky 47 per cent.
So, say if you earn $80,000, then you have a simple choice. Take home a dollar and you have 65.5c to invest. Salary sacrifice into super and you have 85c. Get it? Alternatively, you would need to invest the 65.5c in your pocket and make about a 30 per cent return on it just to grow it to 85c. For higher taxpayers, super becomes increasingly attractive.
This is why super is not an investment. It is a tax structure. You can choose to buy property or shares in super. But I can tell you right now that putting $25,000 a year into super from my salary, including my employer contribution, would be my first priority. The only catch is you’re locking your money away for access later in life.
For that reason, for younger workers, I do agree it is important to build investments outside of super — you will have employer contributions going into super anyway. But the tax advantages of super are super-sized.
Hopefully this has cleared up the key point that super is a tax structure, and not an investment. This means we can move onto the ‘property versus shares’ debate.
Frankly, this is also horrifyingly simple. Despite all the crap pushed on us by sellers of shares (who love shares) and sellers of property (who love property), the truth is that a decent portfolio of shares, or a well-located property, both have pretty similar long investment returns. I really don’t give a rats which way you go as long as you do plenty of research, don’t get ripped off by spivs, and use good old common sense. That is to say, invest for the long-term, and don't overborrow.
In the short-term, good old cash in the bank is the way to go. It is low-return and low-risk. History shows us that if you are investing over the long-term, both property and shares have generally produced much higher returns. And no, long term is not a week, for me, it is over a decade and preferably longer
If you want to ask me what to do, feel free, but my first point will be — do something! Secondly, if you hold property, I will suggest investing in shares to spread your risk. Equally, if you own shares, I will suggest property.
I don’t have the first clue whether property or shares will be ‘best’, so don’t ask me. Some years shares will outperform property, and vice versa. Right now, property is a bit on the nose as it is flat or falling in value in most areas. But our population is growing strongly so we don’t need to be a genius to work out that long-term returns on a well-located property will be ok. And it is the same for a decent portfolio of shares.
You have to invest in a way that you feel comfortable with.
I don’t know you or your situation, but personally, shares are far more interesting to me. This is mainly because I own a home and some investment property, so basically, I have enough exposure there. What also appeals to me about shares is that I can get a wonderfully diversified portfolio with a small amount of money. I love the liquidity aspect of shares and the much higher income stream than I get from property.
With property, I reckon you do your own research and make your own decision. Avoid property selling seminars like the plague.
Shares give you more choice. You can do your own thing and a bit of help is cheap and easy to find. For example, a subscription to InvestSMART will give you a tonne of information to help you build your own portfolio. Personally, I like shares because of the returns I get. I’d rather spend my time with my family and friends. So I buy shares using funds. This applies to my super, where I use low-cost professional managers or to manage my money outside of super.
InvestSMART can help here. We have a range of well-diversified low-cost funds, or, if you prefer, more specialised funds. We are all individuals when it comes to investing. The whole point of the InvestSMART business is ‘you choose’. You can use our research and make your own decisions. You may prefer to use our low-cost funds to give you broad diversification, or like me, you may do a bit of both. I know that big companies of the future are small companies today so I have invested in our Australian Small Companies Fund. As I move into my 60s, regular income is important to me, so I am also investing in our Australian Equity Income Fund.
This fund is an interesting one. First up, it is low cost, under 1 per cent per annum. It is a ‘listed managed fund’. I like this. It means anyone can buy or sell as you can do with share. This keeps costs to a minimum. It also does not invest in our banks. I have no problem with our banks as a long-term investment, but like most of us, I already hold these in my name and in my super. Paying a manager a fee to hold these for me is not that smart.
There are many good funds around with low fees and good managers, but the Australian Equity Income Fund is worth a look. It may suit you (or it may not!).
Our free Portfolio Manager is really helpful whether you are doing your own thing, using managers, or like me, a bit of both.
Anyway, it is your money. No one cares more about your money than you do, so please keep on building your knowledge. But most of the stuff written and said about ‘property or shares’ is pretty biased. My preference is for you to hold both, but only do so after you do your own research.