When choosing to deploy a large sum of money, it is only right to question where is best to invest it. There seems to be a never-ending list of financial opportunities, from hot stocks to cryptocurrencies, gold oil, property or bonds. This article focuses on two of the most popular investment routes available to UK investors – residential property and the stock market.
Property – the basics
Simply speaking there are two ways to profit from investing in property – buying to let and buying to sell.
When buying to let, choosing an area where property prices are low and rental yields are comparatively high is usually required to maximise your investment return. Property prices will vary depending on where you choose to invest, and this can involve risk because the appeal of an area can worsen over time. Another important point to consider is that your revenue stream from a rental property will usually depend entirely on whether it is tenanted. Essentially, you lose money for each day that there is nobody in the property. Purchasing a property for the purpose of renting for a steady flow of income also carries with it the potential of capital gain when eventually selling the property.
If buying to let is for the long-term, then buying to sell is often considered a short(er) term investment (in theory, at least!). Buying to sell usually means renovating, which involves committing further funds before returning to the market to sell the property at a higher price.
This type of property investment is appealing to those who are looking to generate a return on their capital, usually over a relatively short timeframe. However, it should be noted that without the proper expertise and/or a network of contacts, it is easy to end up wasting time and money, either through paying for unnecessary work or overpaying for specific jobs. Similarly, achieving the greatest possible return on a renovation can take a lot of time and effort, particularly if the investor chooses to take a more ‘hands on’ approach.
Stock markets – the basics
When investing in stock markets, the investor is essentially purchasing a unit (or percentage) of ownership in a company, in the expectation that as a company grows, so does the value of the investment. Investing in certain shares will also reward the shareholder by way of dividends, which are usually paid from company profits. Dividends are more likely to be paid out by larger, established companies with more stable and predictable revenue streams.
To buy and sell shares, an investor must access a stock exchange. In the UK, listed shares predominantly trade on either the London Stock Exchange (LSE) or the Alternative Investments Market (AIM), with the former being for large companies and the latter typically being for smaller, lesser-known businesses.
Another way to achieve exposure to stock markets is via collective funds, which are diversified and therefore considered less risky. Unit trusts or investment trusts are the most common types of collective funds; both of which principally pool cash from a wide variety of investors and then invest across a number of different securities in order to spread the risk, often with a very clear objective and investment mandate in mind (i.e. UK equity income, global growth, emerging market debt). Funds are overseen by a manager (or team of managers) with specific expertise relevant to their area of the market, often supported with a well-resourced team
underneath them.
Many looking to invest in stock markets will do so through an investment manager, such as MHA Caves Wealth. The role of an investment manager will vary depending on the client’s preferences but, broadly speaking, they are engaged to advise on suitable investments, help mitigate risk and even manage a client’s portfolio on their behalf; this is known as ‘discretionary’ portfolio management.
Should I invest in property or stock markets?
We consider both asset classes to have their own merits and are cognisant that many will typically already have an element of property market exposure by virtue of owning their own homes. We therefore believe that investing in a diversified investment portfolio, with exposure to a wide range of financial securities, has the following advantages over ‘bricks & mortar’ investing:
‘Hands off’ approach: Investing in a discretionary managed portfolio requires minimal time or effort from the end investor.
Diversification: It is difficult to achieve an appropriate level of diversification when investing in property. Investing via a discretionary managed investment portfolio provides exposure not only to different companies, but also different asset classes, geographies, and currencies.
Flexibility: Unlike property, buying and selling financial securities is quick, easy, and hassle free. For example, should you require funds from your portfolio, we could usually place the sales and have the funds cleared in your bank account within one week.
Be part of something special: As an investor in equities, you can play a role in the growth of the world’s most exciting companies and gain exposure to the technologies and services they provide.
Cost effective: Whilst there are costs involved with investing, we would argue that the initial and ongoing charges associated with stock market investing can be less than that of property investing.
Tax efficiency: The tax rules surrounding second homes and buy-to-let property are much more penal than they used to be. Capital gains tax rates, for example, are higher than those applied to stockmarket investments. Careful use of ISA, pension and CGT allowances can help stock market investors considerably reduce their tax bills.
Historical returns
The chart opposite illustrates the price performance (ignoring any dividends or rental income) of the average UK home (which was £25,580 at the start of 1981) and the MSCI World Index; a proxy for global equities. As you can see, equities have comfortably outperformed UK house prices over this 40-year period.
This article is for general information only and is not intended to be individual investment advice or tax advice. The views expressed in this article are those of MHA Caves Wealth and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. You are recommended to seek professional regulated advice before taking any action.
Key Risks: Past performance is not a guide to future performance. The value of an investment and the income generated from it can go down as well as up, and is not guaranteed, therefore you may not get back the amount originally invested. Investment markets and conditions can change rapidly.
MHA Caves Wealth is an independent wealth management firm in Northampton offering a wide range of services including investment management, stockbroking, and financial planning.
If you would like to start investing, or simply have more questions on the matter, do not hesitate to get in touch on 01604 621421, or you can enquire through our online contact form.
MHA Caves Wealth is authorised and regulated by the Financial Conduct Authority (FCA), Financial Services Register number 143715.