Key Post Why are equities perceived as riskier than property?

ronaldo

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I think a lot of the perception that equities are riskier than property could be traced to the fact that we get real-time pricing on the equity markets.

If we were back in the dark ages and you could only track your equity prices via quarterly updates, people would view them less risky as the long-term upward trend is more apparent than looking at a portfolio during some crisis and seeing that it's down 2% since the day before and 5% week-on-week.

Looked at another way, until the advent of REITS, many would have viewed their underlying commercial properties as less risky than the risk apparent when you look at British commercial REIT LAND and it's one year price chart, ranging between £4.60 and £7.84.

Lots of smaller commercial property owners probably still view their property as less risky because they are unaware of rises and falls in value until they come to sell - yet the values of commercial property are inextricably linked to the value of commercial REITS.

Sticking to the UK example, no one is going to pay the £1,000,000 you may have paid for a property yielding 4.6% when we had zero interest rates now, when you can achieve that same 4.6% from a hassle-free 15 year UK government bond.

If it were possible to trade individual residential properties via a ticker on the market, people would be shocked to see the value of their property change from day-to-day if some unexpected interest rate decision or other economic shock occured - and would probably refuse to believe that it reflected their properties true value because property is "not that risky", despite the falls we saw during the last recession.
 
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Interesting. I suppose you need to define "risk" in the first place.
(A) Is it the probability of a catastrophic collapse?
(B) Is it the probability of suffering a short (or medium, or long) term loss, however small.
(C) Is it volatility, roughly defined as rate of change of value?

If A, then equities are risky on an individual level, while incredibly safe when widely diversified.
If B, then both equities and property are less risky than cash! Particularly in the long term.
If C, then equities (subject to @ronaldo point about day to day visibility) are riskier than property.

One further point. In comparing like with like, you need to count share price growth AND dividends against property appreciation AND rent roll.
 
If A, then equities are risky on an individual level
That's not necessarily true either given the availability of already diversified stocks such as ETFs or conglomerates like Berkshire Hathaway, "baby" Berkshire Hathaways, and so on.

Great post by the way @ronaldo. :)
 
Interesting. I suppose you need to define "risk" in the first place.

Risk is related to the term of the investment.

If I am buying a house in one month, having the proceeds in equities is very risky as the chances of a loss are high. A deposit is almost zero risk over that time frame.

If I am investing for my retirement, a deposit is very risky as it's unlikely to keep up with inflation, so I can expect to lose money. Whereas equities are relatively safe as they are likely to exceed inflation over the longer term.

Brendan
 
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