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Many investors opt for a second property to act as their nest egg for retirement, but equities have significantly outperformed the asset class in the longer term.
Research from broker Bestinvest has revealed in the last quarter of a century, those investors who bought the FTSE All Share index - or just the FTSE 100 - and reinvested the dividends, achieved a return of over 1000%.
Figures provided by Lipper showed an investor buying into the FTSE All Share at the start of 1986 would have seen return of 1110%, while those buying just the FTSE 100 would have made 1165%.
The growth assumes dividends were reinvested, and dividends made up the vast majority of the returns, supporting the argument that shareholders should opt to reinvest income rather than receive it.
Returns were more than double that achieved by residential house prices. According to the Nationwide house prices index, prices rose by 471% on average over the 25-year period to the end of June, while new builds constructed since 1985 returned 378%.
The stock market returns strip out falls seen in August but, even accounting for the sharp pull back, the FTSE All Share still delivered a return of 1086% - nearly 11 times what was invested - while the FTSE 100 delivered 1139%.
Ben Seager-Scott, senior research analyst at Bestinvest, said: "It pays to take a longer-term view, and looking back over 25 years reveals the total returns achieved by the FTSE 100 and All Share indices have been significantly higher than from property prices, even accounting for the various crises."
Seager-Scott said the income reinvested from dividends has been a key factor.
"The compounding effect from reinvesting income can becoming extremely significant - over the last 25 years more than 75% of the total return on the FTSE 100 has come from income reinvestment," he added.
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| Comment | Why you should ditch the second home and invest in shares |
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House price returns
If you are to compare FTSE returns with dividends reinvested, then that is comparable to house price returns with monthly rental income taken into consideration which would increase the total return by a significant amount.
Posted by: Nick
There is no rental income
To be fair to the article it says "second home" not buy to let. Therefore there would be no income,and no Bestinvest do not sell houses but then neither do IFA's. This is a good sales tip that could be used to invest in what we sell! Oh no I mentioned sell they won't like that, can I change that to advise on and receive remuneration for in exchange? Lighten up gents the article is only trying to give us some positives is that so bad?
Posted by: RDR Ready
There IS rental income
@ RDR Ready, Actually it says second property, not home, the obvious connotation being that it is one you do not live in. The fact that it is drawing a comparison between the return on stocks and property means income MUST be factored in.
Posted by: An investor
Diversify
Of course, one of the biggest benefits of property investment is the ability to leverage the gains; so even if the annual returns were on a par, the leveraged gain would be a multiple of that available from equities. Investors know this and IFAs only look naíve if trying to pretend that collectives offer the only route to a diversified portfolio - the only sensible option is to develop a portfolio across several asset classes, equity and direct property included.
Posted by: ifaian
Diversify...
In reality, the returns on direct property are likely to be a multiple of those on equities because of the ability to leverage, even if the simple annual returns are on a par. IFAs may appear naíve if they concentrate purely on collective investments as the route to a diversified portfolio
Posted by: ifaian
Apologies...
Apologies for the duplication, I thought I had lost my first contribution
Posted by: ifaian
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What about rental income?
Has rentAl income been factored in?, if you were holding a house as an investment then you woulD also recieve income, not just capital growth - seems like an unfair comaprison if it insn't included! But then again Bestinvest don't sell houses do they!
Posted by: An investor