The winner for 2009: shares or property?

With this year being a roller-coaster ride for shares and house prices, we reveal the victorious investment for 2009.

Perhaps the most important principle of investing is that of asset allocation. Asset allocation simply means where you decide to put your money, into assets such as in cash, shares, bonds, property and so on.

One fundamental cornerstone of asset allocation is diversification: spreading your money about so that you're not too heavily exposed to one particular asset class. Otherwise, if prices plunge in a market which you've backed heavily, then you could end up losing your shirt.

Nevertheless, concentrating your money in certain asset classes can sometimes pay off handsomely. For example, if your fortune was invested 100% into UK property between, say, 1995 and 2007, then you would have made colossal profits during this 12-year housing boom.

On the other hand, having a large proportion of your wealth in the stock market earlier this century would have been a painful experience. For example, from the end of 1999 to 12 March 2003, the blue-chip FTSE 100 index fell from 6930 to 3287. During this nose-dive, the 'Footsie' more than halved, falling 53% in 26½ months. Ouch!

House prices versus shares from 1999 onwards

Take a look at the following table, which compares the FTSE 100 index with the Halifax House Price Index (HHPI) during the first nine years of this decade:

Sources :FTSE; Halifax HPI (all buyers; monthly NSA data)

As you can see, house prices moved ahead of the FTSE 100 in each of the first five years of the Noughties (2000 to 2004). In 2005 and 2006, shares won through, but property took the lead in 2007 and 2008. Thus, property beat shares in seven of the nine years from 2000 to 2008.

What's more, house prices have been a lot less volatile than shares. In our table, share prices fell in four of the years between 2000 and 2008. House prices fell only once, in 2008. Overall, property is the clear winner, recording a gain of almost 94% in nine years, versus a 36% loss for shares.

Indeed, £100,000 invested in the FTSE 100 on 31/12/99 would have been worth just £63,984 at the end of 2008. A similar sum invested in a typical property (without a mortgage) over the same period would have grown to a handsome £193,643, or over three times as much.

(Note that the above indices only show capital gains and not the income generated from these investments. For a more accurate comparison, we could add in the dividends paid to shareholders and the rent collected by buy-to-let landlords, minus expenses and taxes. Nevertheless, comparing indices produces a decent working comparison.)

House prices versus shares in 2009

As we're well into the final month of the year, now would be a good time to see how property and shares have performed in 2009. I don't have data for December, so the following table covers only the first 11 months of this year:

Sources :FTSE; Halifax HPI (all buyers; monthly NSA data)

As you can see, the FTSE 100 index rose by more than a sixth (17%) in the first 11 months of this year. After falling in the first few months of 2009, house prices have bounced back and are currently sitting on a modest gain of 4.5%.

So, while acres of newsprint have been dedicated to discussing the ongoing state of the housing market, it's the equity investors who have emerged as the big winners in 2009. For what it's worth, I expect shares to beat property in 2010, too.

Here's one final, but crucial, point: we invest in property and shares in very different ways. Most shares are bought in full by investors, using spare cash. However, few landlords buy properties outright. Instead, they put down a deposit of say, 25% and then borrow remaining 75% of the purchase price using a buy to let mortgage.

This borrowing to invest creates 'gearing' -- leverage which magnifies the gains and losses made by the underlying investment. If you factor in this magnifying effect, then the good times become even more go-go for buy to let investors. However, in a slump, gearing can wipe out your 25% deposit in a couple of years. Thus, it pays to go easy on the gearing, especially when prices are looking toppy.

Disclosure: Cliff doesn't own any property and has invested 100% of his wealth in shares.

More: Find your ideal mortgage | The best and worst properties to own | The ten worst property mistakes

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