Forget property and take stocks

Invest in the global market, not bricks and mortar

When I started in financial planning back in 1995, people would often say: ‘I’m buying property. That’s my pension.’

This went away somewhat during the financial crisis of 2008, partly because it was harder to arrange a mortgage, but also because the market became less attractive.

In recent months, however, we’ve seen a resurgence in property investing fuelled by the stamp duty holiday.

A good friend called this week to ask me, ‘Why do you always invest in stocks? Don’t you ever consider the property market?’

My answer was simple – no.

There are logical reasons why I believe equities make better investments than property, but we don’t buy with logic, we buy with emotions, justifying our decisions with logic that will back up the choice we made.

Recently, I spoke to a client who was boasting about a property he purchased for £80,250 in 2000.

Today, it’s worth £210,000, which is a gain of almost £130,000 (I’ll ignore the costs for now).

How does that 4.7% annualised return compare with the market, though? Back in 2000, if he’d invested his money in a straightforward world equity fund – not in Tesla, Microsoft or Rightmove – he would now be sitting on around £313,039. That’s over £100,000 more. When you buy the world stock market, don’t think of it as just buying a fund. Think of it as becoming a part-owner in some of the most valuable companies from around the world such as Apple, Microsoft, Exxon, Johnson & Johnson and Visa.

Which would you prefer: a rental property in your local town, or partownership of some of the world’s greatest companies?

You might be thinking, ‘Wait, you’ve forgotten about the rental income he receives’. And yes, this is generally around 3.5%, which is what my client’s property achieves in a lower risk family unit.

But this isn’t what he keeps. After deducting the letting agent fee, building insurance and tax, what’s left is just enough to keep the roof up. Because, over a 20-year period, how much do you think he needed to spend on the house to keep it in good repair?

There would be the odd plumbing fix, a new bathroom and kitchen and let’s hope he didn’t need a new roof or major structural work.

My grandmother always said to me, “Warren, it’s not what you make that’s important, it’s what you keep.”

An £80,000 investment can be managed hassle-free and tax-free within ISAs and allowances – but when my client sells his home, he’ll pay a ‘success tax’ of 28% on the profit he’s made to HMRC, and that amount, which could run into tens of thousands, will really eat into his return.

If you can afford to buy your own home, you should. It’s a place for you to build memories.

But as an investment, I’ll keep backing Global PLC and allow the best brains and talent in the world to grow my wealth tax efficiently.

To learn more about investing, search for The Money Planner podcast.