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In recent months I have been loading up on cheap stocks, to generate capital growth and income for my retirement.
During that time, the FTSE 100 it has gone up strongly, and the purchases I made last October are already worth much more today. My best decision was to buy an aircraft engine manufacturer rolls royce November 1st.
Property or shares: which one to buy?
I thought it was cheap at the time, but I didn’t expect the stock price rally to be so fast. It’s up 70.91% since the buy button was clicked.
Despite the FTSE 100 recently reaching an all-time high of 8,000, there are still bargains in the index. That’s the beauty of buying individual stocks instead of buying a tracker fund. Not everyone moves at the same speed. The last time I looked Anglo-American, barclays, Kingfisher and Unilever it still seemed cheap to me.
Unlike the FTSE 100, UK house prices have been falling. I’ve considered investing in a buy-to-let property before, though I’ve never really been on my knees. Is now finally the time?
This paradox caught my attention. The FTSE 100 has soared but still looks cheap, while house prices are down but still look expensive to me. So much for valuation, what about performance? There is a buy to let on the market on the same block as mine, priced at £375,000. Tenants currently pay £1,350 a month in rent, which is equivalent to £16,200 a year. That’s a 4.3% return.
That’s slightly higher than the FTSE 100 yield, which is currently hovering around 4%, but in practice it looks a lot less attractive. This is why.
Investing in buy-to-let can be lucrative and works for many people, but it also comes with a lot of upfront costs. The biggest is stamp duty, especially as owners pay a 3% surcharge. That would cost me £17,500, a tax rate of 4.67%. In contrast, the stamp duty on the purchase of shares is only 0.5%
Much trouble?
Since you would need to borrow to buy a buy-to-let property, you would also have to increase your mortgage settlement fees. Then there is the cost and hassle of fixing up the flat, finding tenants, checking them out, doing maintenance work, etc.
This is an uncertain time to buy to let as the government considers new rules to protect good tenants against dishonest landlords. I am concerned that this will make it more difficult for good landlords to evict dishonest tenants.
When I buy stocks, I don’t have such conflicts to worry about. They just sit on my online platform, go up and down and pay me regular dividends. Minimal workload, low stress factor. Of course, the stock market can crash, but I’ve seen so many crashes in my life that it tends to overwhelm me.
Stock dividends could be reduced, so my income stream is not rock solid. I get around it by investing in a balanced portfolio of stocks for the long term, meaning decades, giving my picks plenty of time to recover.
Best of all, my wallet will never call me in the middle of the night to complain about a leaky faucet. That’s why I’m buying cheap stocks today.
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