Mum and Dad's Poor Financial Advice: "Shares Are Too Risky, Property Is a Safer Investment"

You've likely heard it before at a family gathering or Sunday arvo BBQ. Someone mentions they're thinking about investing in shares and without fail an older relative chimes in with shares are too risky mate and property is where the real money is.

It's practically gospel in Australia. Property isn't just bricks and mortar here. It's our national obsession and our cocktail party conversation starter and for many families it's their entire wealth building strategy rolled into one oversized mortgage.

The uncomfortable truth is that advice whilst well-meaning might be setting you up for a reality that looks very different to what your parents experienced.

Let's unpack this.

Australia's Love Affair with Property

Australians have one of the strongest property cultures in the world. It's not even close. We're absolutely obsessed with it.

Turn on the news and you'll hear about auction clearance rates. Scroll social media and you'll see home renovation transformations. Head to a mate's place for a BBQ and within 20 minutes someone's talking about what their neighbour's place sold for or how much their suburb has grown.

If you've travelled or lived overseas you've probably noticed something interesting. Most of the world doesn't operate this way.

In many countries a home is just that and nothing more than a place to live. It's shelter. It's where you raise your family and build memories. The idea that it should also be your primary wealth-building vehicle is uniquely Australian and whilst a few other places share this mindset we've taken it to another level entirely.

Take the United States for example. Sure Americans buy property but for many it's viewed as a boring steady investment. You might get some rental income and perhaps a bit of capital growth that roughly tracks inflation but it's not seen as the golden ticket to millionaire status. It's just one part of a broader investment strategy.

But here in Australia property is different. It's not just an investment. It's the investment that everyone talks about and aspires to own multiple of.

It's seen as the vehicle for building wealth. The more properties you have the better. There are countless hours of YouTube videos and entire books and weekend seminars dedicated to teaching you how to build multi-million dollar property portfolios starting from nothing.

In Australia property equals wealth. It's that simple in most people's minds.

Where Does This Obsession Come From?

The answer is sitting right there at your next family dinner and that's Mum and Dad.

For the Baby Boomer and early Gen X generations property was an absolute goldmine. Even those who didn't understand the first thing about investing and who never read a finance book or spoke to an adviser were able to make serious money during the property boom that kicked off around 2000 and has continued with some bumps until today.

Your parents bought a house in the 80s or 90s for what now seems like pocket change. They watched it double and then triple and then quadruple in value. They maybe bought an investment property or two along the way. They felt like investing geniuses and to be fair the results speak for themselves.

So naturally they pass that wisdom down to you with buy property because it always goes up and it's safe and shares are just gambling.

The problem is what worked brilliantly for the last 25 years might not work the same way for the next 25.

The Problem with Property as a Wealth-Building Strategy

Most people don't think about this but property is not a productive asset in the traditional sense.

When you own shares in a company like BHP or Commonwealth Bank or even a tech company like Afterpay before it was acquired you own a piece of a business that's actually producing something. They're mining resources and lending money and processing payments and employing people and creating value in the economy.

These businesses can grow their profits and expand internationally and innovate and become more valuable over time based on their actual productivity and earnings.

Property doesn't work this way at all.

A house worth $2 million doesn't provide any more value to the economy than a house worth $200,000. They both provide shelter. They both house families. The expensive one might be bigger or in a better location but it's not producing anything more than the cheaper one.

This means there's a natural cap on property's potential future value. In most developed countries around the world property growth roughly tracks population growth and wage growth. That makes sense because if the population grows by 2% and wages grow by 3% you'd expect property to grow somewhere in that range because more people need housing and they can afford slightly more each year.

But Australian property hasn't played by these rules at all.

Over the last 25 years Australian property has grown well above population growth and well above wage growth. Sydney property for instance has grown at roughly 7-8% per year on average over the past few decades whilst wages have grown at maybe 3-4%.

So the question becomes why has property grown so much faster than these fundamentals would suggest and can it continue.

The Greater Fool Theory

Australian property has been caught in what economists call the Greater Fool Theory and it works like this.

People start to expect prices to go up. So they're willing to pay more today because they believe it'll be worth even more tomorrow. When lots of people think this way it becomes a self-fulfilling prophecy. Prices actually do go up because everyone's willing to pay more.

As prices go up more people want in on the action. They stretch themselves financially and borrow more and pay even higher prices. This pushes prices up further.

But as prices climb higher and higher more people get excluded from the market. They simply cannot save enough for a deposit or they can't borrow enough to get into the market even with decent incomes.

The market becomes concentrated around fewer and fewer people who can afford to play the game.

Eventually those property owners want to sell. Maybe they're retiring or maybe they need the money or maybe they're just ready to cash out their gains. But when they try to sell they discover a problem and that is there are fewer people who can actually afford to buy at these elevated prices.

You've seen this yourself. Those For Sale signs that sit up for months. The properties that go to auction with no bids. The vendors who have to drop their asking price over and over.

This happens because the seller's expectation of what their property is worth doesn't match what the market meaning actual buyers with actual money is willing to pay.

Eventually all bubbles pop or deflate. The question isn't if but when. Will it happen next year or in 10 years or will it be your kids who face the music.

Nobody knows for certain but the fundamentals suggest we can't keep growing property values at 7-8% per year forever whilst wages grow at 3%. The maths just doesn't work long term.

The Recency Bias Problem

There's a psychological trap that catches almost everyone and it's called recency bias.

We tend to think that what has worked in the recent past will continue to work in the future. And to be fair that's often a reasonable assumption for many things in life.

The problem is that recent for most of us means our lifetime and maybe our parents' lifetime if we're paying attention. That's perhaps 50-80 years of perspective at best.

But Australia has existed as a country for well over a century. And for much of that history property went through decade-long periods with no real growth at all. Flat. Zero returns after inflation.

The 1980s saw periods where property went backwards in real terms. The early 1990s recession hit property hard. Even in the early 2010s many markets stagnated for years.

Your parents might have been around for the periods did nothing for 20 years. But this has happened twice in that last 150 years.

The Economist's Dilemma

Most economists and financial analysts agree that house prices cannot go up infinitely. It's mathematically impossible. Someone has to buy these properties and if prices keep rising faster than incomes eventually there's simply no one left who can afford them.

Economists have been saying this for 10-15 years now. And they've been wrong in the sense that property has kept climbing with some wobbles along the way.

Does that mean they'll always be wrong and the fundamentals don't matter. Not necessarily. It might just mean they were early. The fundamentals they're pointing to haven't changed. Prices still can't outpace incomes forever.

What we might see instead is a lost decade. Not a crash but years of flat or minimal growth whilst wages slowly catch up. We've seen this happen in other markets around the world. Japan is the classic example where property peaked in the early 1990s and took decades to recover.

Could that happen here. Absolutely it could. Nobody knows for certain.

But what we do know is there's a lot of merit in not having all your eggs in one basket going forward.

The Risk Equation Nobody Talks About

Let's talk about risk properly because this is where the property is safe and shares are risky narrative completely falls apart.

Risk in investing isn't just about whether something goes up or down in the short term. Real risk is about the potential for permanent loss of capital and the concentration of your wealth.

If you own one investment property worth $800,000 in a single suburb your entire investment is dependent on that specific location remaining desirable and that suburb's infrastructure and amenities being maintained and that council making good planning decisions and no environmental issues emerging like flooding or contamination and the property not having structural problems and your tenant paying rent and not trashing the place and interest rates not rising so high you can't afford the loan and the local job market staying strong and that specific street staying safe and appealing.

That's a lot of single points of failure for 100% of your investment dollars.

Now compare that to a diversified investment portfolio worth $800,000. You might own shares in 200 different Australian companies across every industry and shares in 2000 international companies across dozens of countries and fixed interest securities from multiple governments and corporations and perhaps some alternative investments like infrastructure or commodities.

For something catastrophic to happen to your wealth you'd need failures across multiple companies and industries and countries simultaneously. Yes markets go up and down but the diversification protects you from any single event wiping you out.

If your investment property is returning 7% per year combining rent and growth and a diversified portfolio is also returning 7% per year then the property is massively underperforming relative to the risk you're taking.

You're getting the same return but taking enormously more risk by having everything concentrated in one asset in one location that you're probably heavily leveraged into with debt.

Diversification is the only free kick in investing. It's the one thing that reduces risk without reducing expected returns. And yet most Australians don't take it because they've been told property is safer.

What Are Your Other Options?

I'm not saying property is a bad investment. Inner metro property in our major cities has been a fantastic asset over the last 25 years. Many people have built significant wealth through property and that's brilliant.

But it hasn't been the best performing asset class even during Australia's golden run. US tech stocks for example have significantly outperformed Australian property over the same period. A diversified international share portfolio has done extremely well. Even a balanced portfolio of Australian and international shares has been highly competitive with property returns and often with less drama and more liquidity.

So what else can you invest in beyond property and why should you care.

Public Listed Company Shares work like this. When you buy shares in BHP or Commonwealth Bank or CSL or Woolworths you own a piece of businesses that are actually producing goods and services. These companies pay dividends from their profits and can grow their value based on their business success. You can invest in Australian companies and US companies and European companies and Asian companies. The entire world's productive capacity is available to you.

Exchange Traded Funds and Managed Funds are pooled investment vehicles where your money is combined with other investors to buy a diversified portfolio. A single ETF might give you exposure to 200 or 500 or even thousands of companies. You can buy ETFs that track the ASX 200 or the S&P 500 or global shares or bonds or commodities or any combination. They're low cost and transparent and liquid.

Private Business Investments mean you could invest in private companies either as a direct investor or through private equity funds. This is higher risk and less liquid but it gives you exposure to businesses before they're publicly traded.

Fixed Interest and Bonds are essentially loans you make to governments or companies in exchange for regular interest payments. They're generally lower risk than shares but provide steady income. Government bonds from stable countries like Australia are considered extremely safe.

Alternative Investments include things like infrastructure projects and think toll roads and airports and utilities and commodities like gold and silver and oil and real estate investment trusts called REITs that own commercial property and more specialised investments.

You can spread your risk around the entire world's economy rather than concentrating it in one house in one suburb in one city in one country.

Understanding Risk Properly

This brings us back to understanding risk properly because it's the heart of why the property is safe advice is so problematic.

Risk isn't just about volatility or whether you can see your investment value go up and down. Real risk is about concentration risk which means having all your wealth in one asset or asset type and leverage risk which means borrowing money to invest and that magnifies both gains and losses and liquidity risk which means not being able to access your money when you need it and market risk which means being exposed to a single market that could decline.

Property scores poorly on almost all of these metrics. It's typically highly concentrated meaning one or two properties and heavily leveraged meaning 80-95% loan-to-value ratios are common and extremely illiquid because it takes months to sell and exposed to a single market which is Australian residential property.

A diversified portfolio of shares on the other hand scores well on most of these metrics. It's diversified across hundreds or thousands of holdings and can be held with no leverage if you choose and is highly liquid because you can sell in seconds and can be spread across global markets.

Yes share markets fluctuate more visibly on a day-to-day basis. You can log in and see your balance move up or down. Property doesn't have this visible volatility but that doesn't mean it's not risky. It just means you're not checking the price every day. If you got a daily valuation on your investment property you'd probably be horrified by how much it actually fluctuates behind the scenes.

What This Means for You

So where does this leave you as someone in your 30s or 40s trying to build wealth whilst juggling work and family and everything else life throws at you.

First you need to recognise that you're not your parents. The investment landscape they navigated was different. They bought property when prices were much lower relative to incomes and when interest rates were higher meaning more room for them to fall and boost prices and when lending standards were looser and when Australia's property market was earlier in its growth cycle.

You're investing in a different era. Property might still have a role in your wealth-building strategy but it probably shouldn't be your only strategy.

Second you need to understand that building wealth doesn't require you to become a property mogul with multiple investment properties. There are simpler and more diversified and less stressful ways to grow your money.

A professional couple in their 30s who consistently invest $2000 to $3000 per month into a diversified portfolio of Australian and international shares can build significant wealth over 15-20 years. They don't need to manage tenants or worry about maintenance or lose sleep over interest rate rises. They're building wealth through owning pieces of businesses that are producing value around the world.

Third you need to recognise that your time is valuable. Property investment is active. It requires research and maintenance and tenant management and ongoing attention. For busy professionals and families who already feel time poor this can be exhausting.

Passive investing through diversified funds is exactly that and it's passive. You set it up and contribute regularly and get on with your life. You're not getting calls about broken hot water services or chasing late rent payments.

The Path Forward

None of this means you shouldn't buy a home to live in. Home ownership has benefits beyond pure financial returns and that includes stability and security and the freedom to make it your own and yes forced savings through mortgage repayments.

And it doesn't mean investment property is always wrong. In the right circumstances for the right person with proper diversification alongside it property can absolutely be part of a wealth-building strategy.

But it does mean you need to question the automatic assumption that property is safe and shares are risky. That's outdated thinking based on one generation's specific experience during a specific period of history.

Your wealth-building strategy should be based on proper diversification across different asset types and markets and understanding real risk not just perceived risk and your actual life circumstances and time constraints and goals and what's likely to happen in the future not what happened in the past.

The families I work with who are building real wealth aren't putting all their eggs in one basket. They're thinking broader. They're recognising that owning pieces of businesses around the world alongside perhaps a home and maybe one investment property gives them multiple pathways to wealth.

Small Actions Big Results

I know what you're thinking. This all sounds great Sam but I'm already stretched. I've got a mortgage and childcare costs and I'm trying to enjoy life now too. I don't have time to become an investment expert.

I get it. Time is your scarcest resource.

Building a diversified investment portfolio doesn't require you to become an expert or spend hours managing it. Small consistent actions compound into significant results over time.

Setting up a regular investment plan into diversified ETFs might take a few hours initially and then it runs on autopilot. You're building wealth whilst you're at work and whilst you're at your kids' weekend sports and whilst you're sleeping.

Compare that to managing investment properties and the time equation looks very different.

The Bottom Line

Mum and Dad's advice came from a good place. They watched property make them wealthy and they want the same for you. But the world has changed.

Property prices have grown to levels that make future growth at historical rates mathematically challenging. Diversification has never been more accessible or important. And your time has never been more valuable.

The families who thrive over the next 20 years won't be the ones who blindly followed old advice. They'll be the ones who thought critically and diversified intelligently and built wealth across multiple assets and markets.

You don't have to choose between having a life now and building wealth for the future. You don't have to become a property baron to be financially successful. And you definitely don't have to put all your eggs in one basket just because that's what your parents did.

There's a better way forward and it starts with questioning old assumptions and building a strategy that actually fits your life and your risk tolerance and the economic reality of today.

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The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.