Most people, over a lifetime, will have exposure to both shares and property, and both are worth considering in any portfolio - but is either ahead when it comes to the various different aspects of an investment?

Let's look at the evidence:

1. Investment returns

The Australian Stock Exchange publishes 20 year investment returns of different asset classes. These are available on the ASX website. For the 20 years to the end of December 2006, Australian shares had an average return of 11.1 per cent a year, while residential investment property had an average return of 11.7 per cent a year.

For the same ending date, but over 10 years, Australian shares had an average return of 12.8 per cent and residential investment property had an average return of 11.7 per cent a year.

Result: TIE, although the ASX survey does also look at after tax returns, and Australian shares tend to be a little more tax effective because of the tax credits - franking credits - that form part of their income.

2. Liquidity

Liquidity is how easily either investment can be turned into cash. Shares are more liquid - if you sell one day you will get payment within a week or so. Property can take months.

However, this may not actually be a good thing - we know that one of the key reasons many people don't get good sharemarket returns is that they are buying and selling all the time. Liquidity might help destroy investment returns (eg. last fortnight we discussed the Odean and Barbara research that showed that women were better share investors than men - because they traded their portfolios less often).

Result: Shares are more liquid, however does this just promote 'bad' investor behaviour?

For retirees and the like, shares do offer the ability to sell part of their holdings when cash is needed.

3. Tangibility

This is a big argument by property investors, they like to have a tangible assets. However investing in companies provides exposure to intellectual and human capital - ideas and people that drive profit growth. Most companies also have some tangible assets.

Result: Shares do expose peole to a broader range of inputs (people and ideas as well as tangible assets).

4. Diversification

This is an area where shares do win. With $10,000 you can go out and put together a diversified portfolio of shares. With a $350,000 property investment it is able to be adversely impacted by fire ants/highway contstruction/industrial construction and so on. It is easier to build a well diversified portfolio of shares.

Result: Shares offer greater diversification, however real diversification might be owning some shares and some property assets.

5. Lower borrowing costs

If you are borrowining to invest, and many people do, it is cheaper to get a loan secured against property than against shares. This is important to consider if borrowing is part of your wealth creation strategy.

Results: Property

6. Interest Rate Risk

At the moment I am seeing quite a few people who have purchased a $350,000 property, who get their mortgage down to $250,000 and then want to buy another property. The difficulty is that if they then borrow another $350,000 they have a $600,000 mortgage (or two mortgages valued at $600,000). And if interest rates go to 15 per cent, they are paying nearly $100,000 a year in repayments.

Sure, interest rates are nowhere near 15 per cent, however they went higher than this is the early 1980s with Howard as treasurer and then spiked again with Keating as treasurer. It is a scenario worth keeping in mind. To have a home and invest in an investment property you are exposed to this risk of increasing interest rates. With shares you can start with a small amount of money, and invest regularly over time without needing to borrow - or managing that borrowing at a much lower level.

Results: Shares

Overall

Being exposed to shares and property might be the answer for an independent investor.

The important thing is to be investing regularly in assets with higher returns like shares and property, with a very long term view.

If, 20 years ago (to the end of December 2006) you had invested $100,000 in property or shares, today - after tax at the highest tax rate - it would be worth $560,000 if it had been invested in shares, or $540,000 if it had been invested in property.

If it had been invested in cash (with a return of 3.4% after tax at the highest rate) it would have been worth $195,000.