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Shares, gold, real estate, cash: strengths and weaknesses.

July 10th, 2009 · Greg Atkinson · No Comments

Investing can often stir people’s emotions and nothing seems to get people fired up more than when the topic of which asset class or investment will provide the best returns is discussed. So rather than try and pick “the” best asset class, perhaps it is useful to just discuss some of their various strengths and weaknesses without trying to predict future prices or capital gains etc.

To keep things simple I will look at the most commonly discussed investments and in doing so I am aware I will be overlooking other investments such as bonds, precious metals and stock futures. If anyone one wishes to cover these then please feel free to leave a comment.

Also I am not suggesting my simple list covers all the advantages and disadvantages of each investment, but I do hope it at least covers most of the major ones.

Australian Listed Shares and Stocks.

Strengths

  • Potential for high capital gains.
  • Can provide income via dividends and distributions.
  • Can be a tax effective way to earn income via franked dividends.
  • Capital can be accessed fairly quickly (within a few days) if needed by selling holdings.
  • Relatively low transaction and holding costs.
  • Can be a good way to diversify an investment portfolio. Shares in Exchanged Traded Funds (ETF’s) and Listed Investment Companies (LIC’s) can offer investors exposure to a wide variety of investments from overseas stocks  to unlisted companies.

Weaknesses

  • Potential for significant losses. Holdings in a particular stock (or stocks) can be reduced to zero.
  • Income via dividends are not guaranteed as companies may fail or dividends be cut or stopped.
  • Can become a burden to manage a stock portfolio in terms of keeping track of when stocks were bought, sold and dividends received etc. This work can be outsourced but if so, this would drive up holding costs.
  • Stock markets are often volatile in nature and large changes in stock prices can be unnerving for investors.

Gold

Strengths

  • Potential high capital gains.
  • Seen a safe place to store wealth in troubled times.
  • Highly unlikely that entire value of gold holdings would be wiped out especially if you take physical possession of the gold.
  • Fairly easy to covert gold to cash.
  • Low holding costs in terms of management fees and transaction costs.
  • Is a tangible physical asset..you can touch it.
  • There will always be someone willing to buy it. Gold has been traded for centuries.

Weaknesses

  • Potential for significant losses.
  • Generates no income until sold.
  • Can often trade well above it’s intrinsic value and therefore investors can be paying a premium simply because it is “gold”. This is especially true if you invest in gold coins.
  • The gold trading market is complicated and not it easy for many investors to understand.

Australian Residential Real Estate.

Strengths

  • Potential high capital gains.
  • Can provide rental income.
  • Can be a tax effective investment.
  • Is a tangible physical asset..you can touch it.
  • It is relatively easy for most people to understand the fundamentals behind investing in a house or apartment.
  • It has an intrinsic value,  it is unlikely a property will ever be worthless.

Weaknesses

  • Potential for significant losses.
  • Relatively high holding costs in term of council rates, insurance and maintenance costs etc. when compared to shares,  gold and cash.
  • Rental income is not guaranteed.
  • Requires active management in terms of arranging repairs, managing tenants etc. This work can be outsourced but if so this would drive up holding costs.
  • The housing market is complicated and home prices vary from city to city, even street to street.

Cash.

Strengths

  • Generally a very safe investment.
  • Easy to access funds using “at call” accounts but it can be difficult to access money in term deposits etc.
  • Can provide a reliable if modest stream of income via interest payments.
  • Very low holding costs.

Weaknesses

  • No potential for capital gains.
  • Can significantly under-perform other assets classes.

Notes:

  1. I have assumed that either no or relatively little money has been borrowed to invest in any of the assets above otherwise it just makes things complicated.
  2. Cash means cash in a bank, not in a managed fund.
  3. A gold investment means either investing in physical gold or via an exchange traded fund.
  4. This is just a simple list. It is not intended to be a risk profile of each investment or the complete guild to investing.
  5. Please feel free to suggest further strengths and weakness for each investment area.

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