NZ Herald 22 September 2012

AOh no, not shares vs property again. Over the years I’ve come to the conclusion that comparing the two is not comparing apples and oranges, but apples and elephants.

Among the difficulties:

• Should you include rent? If someone buys an expensive house to live in — as opposed to buying a cheaper house and also investing in shares — they don’t get any rent. Then again, they do live in a flasher place.
• On the other hand, if we compare shares with rental property, of course we should include rent in the same way as we include dividends. But what level of rent? It varies so widely.
• We should subtract expenses, which are much higher for property than shares. But how much for rates, insurance and maintenance — all of which also vary hugely?
• With shares, unlike direct investment in property, it’s easy to spread your money by investing in a share fund. How should that be taken into account?
• It’s usually much easier and quicker to get out of shares than property. That might not matter much. But if a property investor loses their job and can’t keep up with mortgage payments, having to sell a property fast can mean accepting a much lower price than hoped for.
• It’s also much easier to sell part of a share investment than part of a property. Again, that flexibility might or might not matter.
• The biggest difficulty is what do we do about gearing — the fact that nearly all rental investors — but hardly any share investors — borrow to invest.

With gearing and good luck, you get gains on the borrowed money as well as your own deposit. And the more you gear, the more you gain — or lose if things go badly.

It’s largely gearing that makes some people wealthy through property, and many others comfortably off. House prices usually rise, and most people cope with cash flow requirements along the way.

There’s no denying, though, that gearing boosts risk. A heavily geared rental property is probably a good deal riskier than an ungeared diversified share portfolio.

The upshot of all this? If we compare a typical share investment with a typical property investment, the winner will depend on our assumptions.

Then there’s the tricky question of time period. As you point out, 40 years is unrealistic. But if we go shorter, our results may depend on which asset happened to go through a boom during the period.

And how do we quantify the various worries? With a rental property, there’s the possible absence of tenants, or non-paying tenants or destructive tenants. With shares, there’s the helplessness of watching a share market plunge.

In the end, I think there are property people and share people. As long as you invest in either with an awareness of the risks — and a plan in case things go wrong — you will probably do well over the long term.

But I do mean the long term. Nobody should count on good results in either shares or property over less than, say, ten years.

By the way, I don’t go along with one comment in the Herald article, that because the research looked at the biggest 50 companies it missed the small “penny-dreadful” shares.

Small shares include losers, but also up-and-comers whose prices are about to zoom. On average small shares usually outperform large ones. If they had been included, shares would probably have done even better.

Apples and elephants? Let’s just let the elephants eat the apples, and each reader can choose which are shares and which are property.

Footnote: It’s not really fair to say the article was “poor”. It included criticism of the research. A bit of messenger shooting going on?

ATo answer your questions in order: Then we’re all stuffed. Then we’re all stuffed. Then we’re all stuffed. And my research is certainly not confined to what New Zealand journalists say. I wander far and wide on the internet — but perhaps don’t linger in the shadowy places quite as long as you do.

Meanwhile, our Doom Merchant friend has responded to last week’s query about whether he uses banks, as follows.

AWell, some folks. I take much more notice of those who bother to email me and sign their letters, and their opinions are gloriously mixed. See the next two Q&As.

P.S. I love “sheeple”.

AWell put.

ABut that’s my very point. We do bounce back — although perhaps not from a major asteroid strike. But there’s not a lot we can do in preparation for that risk.

More on this topic next week — but not too much more.

AYou’ve probably heard of the Domestic Purposes Benefit, but thought it was available only to sole parents.

It turns out, though, that there’s also a DPB — Care of Sick or Infirm. It’s for people caring for someone — other than a spouse or partner — who lives at home and needs full-time care, and who “would otherwise need hospital care, rest home care, residential disability care, extended care services for severely disabled children and young people, or care of a similar kind.”

There’s a name change coming, though. “Under welfare reform changes to be introduced next year, benefit categories will be reduced to three types, and this benefit will become a Supported Living Payment,” says a spokesperson for the Ministry of Social Development.

The benefit is paid by Work and Income a.k.a. the government a.k.a. taxpayers. It’s probably a pretty good deal for taxpayers, actually, given how much the government might otherwise spend on providing the care.

The maximum weekly amount is $256 after tax if you are a single carer over 18, or $213 if you have a partner and the combined family income is less than $39,890 a year. The amount you receive depends on several variables. Generally speaking, people on higher incomes are not eligible.

For more information, see tinyurl.com/carersbenefit. And for more on the income “cut-out points” see tinyurl.com/carersbenefit1.