In our regular column, Money Matters, SIMON PARFITT, financial advisor at Pyrmont Wealth Management in Hong Kong answers your questions on finance. Here, he considers where you should put your money for the best return on investment.
“What is a better investment, property or the stock market?”
While return on investment is important, there are many other things to consider when investing. Let’s consider both options.
Property provides an income in the form of rent and hopefully capital appreciation as property grows in value. Taking the UK as an example, top rental areas there can generate between 7 and 10 percent in rental yields; London can be lower at around 3 percent. However, yields can be significantly reduced with things like management fees, service charges and general maintenance costs as a landlord.
Another potential advantage is leverage (that is, borrowing). Let’s say you buy a property worth $500,000 with a down payment of $100,000. The property grows in value by 3 percent ($15,000) which means you have earned a 15 percent return on your initial investment of $100,000. Compare this with average yearly returns of the S&P 500 Stocks & Shares Index of around 10 percent.
On the other hand, the fees associated with property investment can add up. In the UK, initial stamp duty alone can be over 10 percent of the property value if you are buying highvalue property and already own another property somewhere else in the world. We should also note that if you own property in the UK, those assets will be liable for capital gains when sold and also inheritance tax of up to 40 percent, even if you’re not British or UK-domiciled.
Investing in the stock market is an effective way of diversifying your money. If, for example, you invest in the FTSE 100 index, you are investing in 100 companies, and it is not uncommon for one portfolio to provide exposure to more than 10,000 different stocks. Investing in the stock market is also relatively low maintenance compared to being a property landlord.
We should also note that while past performance is not an indicator of future performance, the stock market has grown consistently over time. Since 1996, the S&P 500 grew by 621 percent, irrespective of different financial crisis and geopolitical issues. (Source: Motley Fool.)
Yet investing in the stock market isn’t for everyone. Prices can fluctuate in the short term and it requires that you remain disciplined and unemotional. This can be difficult for even seasoned investors. You also need to be vigilant on the fees you’re paying as it’s not unheard of for traditional active management strategies to cost 2 to 3 percent per year. Comparatively, a low-cost evidence based approach may cost around 0.3 percent or even less, which is a huge saving over time.
A balanced approach
Overall, a smart investment strategy is to be well diversified by geography and asset type. Therefore, it may not be the best decision to be solely invested in the stock market or property. Having a balanced approach will ensure you are spreading risk and enjoying the benefits of both.
Ask Pyrmont for advice on where and how to invest your money. Simon is regulated by both the HK Confederation of Insurance Brokers (011833) and the Securities and Futures Commission (BGY807).
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This article first appeared in the Home Decor issue of Expat Living magazine. Subscribe now so you never miss an issue.