Stocks vs Property – Which is a Better Investment?

Anyone who has checked out my own personal portfolio will know that I’ve got a mixture of stocks and properties so obviously I’m a fan of both.

Picking between the two in order to choose one as a better investment than the other is difficult as both have different pro’s and con’s.

Both also return slightly differently.

To highlight that to you and try to solve the stocks vs property debate here’s a comparison of two recent investments I’ve made. One in an index fund and the other in a two bed buy to let.

Stocks vs Property Compared

To understand both investment types and to really be able to decide which is the better option, stocks or property, both need to be looked at in terms of pure numbers and in terms of passivity.

It’s also important to forecast how these investments will perform over a long time period.

Stocks: Numbers, Pros & Cons

On October 16th 2017 I bought £20,000 worth of Vanguard’s S&P 500 UCITS ETF. Basically that’s £20,000 invested into an index fund which tries to mirror the performance of the S&P 500 (the top 500 companies on the US stock market).

Today that investment is worth: £34,959 showing an increase of £14,959 over a 40 months.

Here’s what the S&P has looked like over that time period:

It’s important to remember that over this period of time, regardless of volatility, the market in the US has been doing great and will almost certainly not perform this well over a long period of time.

To highlight that fact, if that money had been in a similar index fund that instead tracked the FTSE 100 index (top 100 UK based companies) it would now be worth £19,447 for a less than impressive £553 loss.

Over that time period I have not lifted a finger. From time to time I’ve checked my investments value (in fact I’ve moved it around substantially since) but the fact remains that it’s a simple buy and hold strategy.

Note: I have paid fees on that investment but for the purpose of this article I won’t get into the weeds on the amounts. You can learn all about that by reading my Index Funds vs Managed Portfolios article if you’re interested.

Having looked at the numbers lets quickly look at the pro’s and con’s of holding investments in the stock market.

Pro’s

• Once you’ve bought in you don’t have to do any work to maintain your investment.
• If markets do well over the time period you’re invested then your capital can grow quickly.
• If held in index funds investments can be very cheap to hold (circa 0.07% p/a in fees).

Con’s

• There’s a very real possibility you can lose money when investing in stocks. You can structure your portfolio to try to avoid this but it’s possible nonetheless.
• There’s a temptation to check the value way too often and move, or even remove, your investment when the market turns against you. Problematic because you miss gains when the market rebounds.
• Investing over a short time period can be hyper volatile.
• Predicting the amount of money earned from your investments over a certain period is almost impossible.

Property: Numbers, Pro’s & Con’s

In late 2018 we (my wife and I run the property business together) added a two bed flat costing £39,000 to our property portfolio.

The flat was an absolute wreck. Here are some before pics to highlight that:

We spent a total of £25,000 doing this place up… re-wire, new central heating system, new kitchen, new bathroom, external works, the lot.

After 6 months of works ongoing on the project we were invested for a total of £64,000 and managed to find a tenant who pays £550 per month to live there.

And… if you ask me the tenant got pretty lucky because this place looked great once it was finished and everything was brand new.

We’ve calculated our yield on this place at 9.28% (it’s one of the best we’ve got in our portfolio).

You can see how that calculation works by reading my post on good rental yields as I use the same example there.

All in all it makes us £5,940 per year in rental income (give or take some maintenance).

For comparisons sake: over 40 months, the same time as the index fund has been invested, we’d forecast a total return of £19,800 (that’s vs the £14,959 that the stocks investment made).

It’s also important to note that in today’s market the value of the flat would be a (conservative) £70,000.

No doubt that’s looking like a solid deal at the moment but don’t forget that upfront a lot of effort and energy went into the investment.

It was hands on throughout the entire process right through from legals to refurbishment. Tenant find and management was outsourced.

This type of project comes with multiple stress points and no matter how smoothly you think things might go there are always hold ups.

Dealing with tradesmen is an art unto itself and when compared against holding an index fund this investment felt more like a job than anything else.

Pro’s

• Returns are comparable, if not better, than that of stocks even when the market has been deemed to be performing well.
• Money is earned passively after the initial time requirement is completed.
• Capital growth can occur alongside rental income improving the investment further.
• You can add immediate value by doing the refurb.
• If the market falls rent will stay the same so cash flow is unaffected.

Con’s

• Income does not compound in property in the same way as it does in stocks (play around with my compound calculator to see what a big impact that can have on returns).
• A substantial amount of time is required to manage the investment initially.
• An amount, all be it small, of time is needed to manage the asset long term.
• Tenants can stop paying rent and be hard to evict.
• Big maintenance issues can wipe out monthly or even annual profits depending on severity.
• House prices can fall so your investment depreciates in value.
• Void periods can be costly if lengthy for any reasons.
• In 15-20 years time, possibly sooner, another refurb may well be required along with all the time and money that entails.

Property or Stocks: Which Investment Is Best Then?

When my stock market investment is compared against my property investment, from a pure numbers stand point, the property investment is winning out.

Given that’s happening when the stock market is buoyant it’s easy to quickly dismiss stocks in favour of property because, with the right deal, you’ll make more money.

Property also looks good because when the market drops, like in 2008, rental incomes remain the same and even improve. It’s easy to sit and wait for the market to recover and not worry too much about the current price of your asset.

You can just as easily do this with stocks but for some reason people find it much harder to just leave them alone.

However…

There are some significant downsides to owning property vs stocks and for me the biggest is the time investment required.

Property, when in the development phase, can turn into a full time job as opposed to an investment and time is something many investors simply don’t have.

Property also requires a level of management and maintenance that stocks simply don’t so it’s got to be considered less passive and more time intensive.

What’s the bottom line here?

In my opinion, the bottom line here is that both investments have their own merits and that’s why I have both as part of my overall portfolio at somewhat of an even split.

Property, for me, is the safer bet and if done correctly one I can use to earn as good as or better returns than I can get from the market. I like the lower short term volatility property provides and the regular cash flows.

Stocks on the other hand offer the opportunity to invest in a very hands off manner and not miss out on the opportunity cost of having cash sat in the bank doing nothing. I’m not in love with the volatility but because I’m not over committed it’s something I can live with.

Only you can decide which investment type is best for you between stocks and property. As long as you know and fully understand the reasons why you’ve invested in either or both then you’ve done as much as you can.