NCB report Property Vs. Equities

[daltonr]

Re: Property V Stocks

There are other ways to borrow for shares.
I'm not advocating this, I'm just saying the option is there.

If you like the look of a couple of shares that have a Dividend Yield of say....7%. You can also get a loan at about 7%.

Now you've got a portfolio of shares paying the interest on a loan. You just have to pay off the loan itself. Also your
dividends are likely to increase each year.

At the end of the loan period you've got the shares without paying any interest, and you've gotten the Capital appreciation based on the share price 5, 10 years ago.
And you've got a dividend income.

Many people remortgage their home to buy an investment property. But wouldn't dream of doing the same to buy shares.

The only difference in my opinion is people *think* they understand mortgages and property, but don't understand shares.

As Brendan pointed out the so called risk associated with the two types of investment are often misunderstood.

There are a lot of myths that go into this.

1. Shares are more expensive to get into than property.
Not True, Property is more expensive. See Brendan's Post.

2. Shares require greater knowledge and research than
property.
Not True, anyone can buy a share, picking the right ones
can be done almost mechanically.

3. Property Prices Never Fall.
Tell that to anyone with Negitive Equity.

4. Share prices go down as often as they go up.
Not True, the overall trend has always been up.

6. You can't borrow to buy shares.
Yes you can. You can borrow to buy jelly babies if you like.

7. Property Performs better than shares in the long term.
Shares perform better than property in the long term.

8. You can't get an income from Shares, you have to sell them
to make any money.
Not True, high yielding shares return an income just like high yielding property does. The only difference is that Big companies are less likely to default on their dividend than a tennant is to default on his rent.

-Rd

 

[rainyday]

Re: Property V Stocks

If you like the look of a couple of shares that have a Dividend Yield of say....7%

While I'd agree with the general thrust of your post, I'm not aware of any shares offering this kind of dividend yield - 3% or 4% maybe - but not 7%, afaik.

 

[daltonr]

Re: Property V Stocks

You can find almost any dividend you like if you look outside Ireland. E.g. UK Shares smaller companies.

I've seen Yields of 20%, but I wouldn't put the contents of my piggy bank into them much less borrow on the strength of them.

Obviously high yield sometimes means a bargain and sometimes it genuinely is a dog and if your borrowing to invest you better be careful that you're confident which it is.
The higher the yield the more likely there's a serious problem and the price is reflecting that.

Also if you have to look outside the country to find the higher Yield you face additional risks, but that's the same dilemma faced by people who think buying property abroad is good because Ireland is over valued.

Again, I'm not advocating this strategy, It's not even something I'd do myself. But it's an example of A WAY to borrow while investing in shares.

Of course in many cases rental yields from property doesn't cover the interest on the mortage that services it. People bank on increasing yields and eventually owning the asset outright. They are willing to plough in more money over time to get there.

To come back to the original point, people think they understand Property, and often they don't.
They think Shares are more complicated and risky than they really are.

I sometimes wonder if as more and more Irish people discover the benefits of long term returns from shares and more Irish people get involved in direct investment in equities, will there be a surge in the ISEQ from the new found interest.

It's clear that the 20 and 30 somethings today will be far more willing to buy shares than their parents were. With such a low percentage of the population invested directly in shares today, is the ISEQ about to blossom?

We live in interesting times.

-Rd

 

[Brendan Burgess]

Re: Property V Stocks

Hi Rd - an interesting general point and I do agree that people should consider borrowing to invest in equities in some circumstances. However...

1) If you are borrowing to invest, you are probably better off investing in property. The main reason is that you can write the interest paid against your income for tax purposes. You cannot write the interest paid on borrowings to invest in shares. ( This is a general point. Although I am reluctant to time or predict the markets, right now I believe that there is far more risk in property than in equities, so right now I would not let this tax planning point switch me from equities into property).

2) I don't think that you should invest in shares if it is costing you 7% to borrow. If you can remortgage your home at 3% or less then it may be worthwhile.

3) I don't think you have to restrict yourself to high yielding shares. If you borrow to invest in shares, you probably should simply pick the top 5 blue chip shares. You should be able to service the loan interest and repayments from your other income. If not, then you probably should not be borrowing.

4) The case for investing in shares has always been very strong in Ireland, yet most individuals shy away from them. But the big money is in the institutions who have usually preferred shares to property. In the event that there was a mass conversion of private investors to equities, I don't think it would affect the market significantly. And at the first downturn, they would all be running out again.

Brendan

 

[daltonr]

Absolutely

Brendan,

I absolutely agree, if you have the option to borrow at 3% rather than 7% then it makes sense to do that, regardless of the yield.

I was making the point that you don't necessarily need to stake your house on an investment in shares. A loan with a higher interest rate could still be considered, if the Yield was high enough.

It's a shame the Eircom thing went the way it did. I know people who will never dip their toe into equities again as a Result.

Similarly I know people who happened to start pensions a few years ago and got hammered when equities fell. They now consider Pensions as a bad idea.

-Rd