Crankys Nest Egg

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How Property Investors Should Think About Buying Shares

Discussions about share investing vs real estate investing can be emotional and divisive. Having owned shares in varying quantities for around twenty years now, I was surprised at the reaction of a former colleague I ran into recently when the conversation turned to investing.

(I should say up front that he is a really smart guy, despite how our conversation developed.)

It turns out that this guy has recently sold an investment property and has a fair sum of cash burning a hole in his pocket. He was lamenting the low interest rates on offer at the moment for savings accounts or term deposits and was looking for a better return.

“So what would you do with the money?” he asked me.

“Depends” I said. “Will you need the money for anything soon, or this this a long term investment?”

“This is long term mate. This is so I can escape the rate race one day.”

“In that case, I would consider investing in shares. Might help to diversify if anything ever happens to the Australian property market” I suggested.

“What??” he almost choked. “That’s pretty risky isn’t it?”

“If you’re not keen on buying shares in individual companies, you could just buy something that essentially tracks the entire market. There are some large listed investment companies - like Argo or Australian Foundation Investment Company - who hold a broad selection of Australian shares, or maybe an ETF which tracks one of the Australian equity indexes.”

He was now looking at me warily - as though I had sprouted another head or something.

“But what if the price goes down? I don’t won’t to lose my money.”

It was at this point that I first began to understand the chasm between his perspective and mine when it comes to the stock market.

I tried different tack - “What if you had just bought an investment property and someone approached you and said they would take it off your hands for 20% less than you paid for it?”

“I’d tell him to get lost.”

“What if for the next 3 months someone comes up to you and offers prices which are 30%, 40% or even 50% less than what you paid for it?”

“I’d just ignore it.”

“So, what if you treated the stock market the same way? If you’re investing for the long term, just forget about the day to day noise. Just consider that in ten years time your investment should be worth considerably more - even though there will be ups and downs along the way - and you will get a steadily growing stream of dividend income along the way.”

The look on his face was still doubtful, but I think I had at least given him another way to think about investing in shares.

I haven’t caught up with him since then so I don’t know what he decided.