Recently I published an article in response to a factually incorrect and irresponsible article from the Stuff news website.
Well they are at it again.
They are encouraging people to invest in shares to pay for a housing deposit. You can read the article here
And to follow up, Sharesies who don’t always do what is best for their customers, decided to promote the article on their Facebook page. How irresponsible is that? Most of Sharesies investors are “beginners” and don’t know any better. Encouraging people to invest in shares to fund a house deposit just for a bit of publicity is extremely irresponsible.
Rightly or wrongly, many people put their trust in investment providers doing the right thing. This is one way to break that trust and sullies the name of all providers, even the good ones who are trying to do good by their customers.
Why using shares for a house deposit is such a bad idea
Shares are extremely volatile. One year they can go up in price by 30% and the next year they could be down by the same amount. Even more.
So imagine that you are 6 months away from buying a house with a $100K deposit. You are saving $2K a month and have already saved $88K. Then over the next 6 months share prices go down by 30%. All of a sudden, instead of having $100K saved, you have $75K.
Not only do you not have $100K saved but you have gone over half a year back in time. Who knows how much that extra 6 months of saving will cost in you in terms of increasing house prices too.
It’s not even worth it.
Let’s say you are aiming for a $100K house deposit. You are saving $2K a month and can either receive 7% returns from the share market, or 2% returns from savings.
This will take you about 44 months if investing in shares and 48 months if in savings.
Incredibly, for all that extra risk of investing in shares and you are only saving yourself 4 months.
Of course this is just an example and share returns could be higher. However, they could also be much lower. This is not risk that a typical home buyer should be prepared to be taking on.
Even if shares did return 12% per year then it will still take 41 months.
When saving your first $100K the most important factor is your own contributions, not investment returns.
Even with returns of 12%, 81% of your final balance comes from your own contributions. Only 19% from investment returns.
This shows that early on in your investing, your own contributions are what matters the most. Why risk losing so much of your own contributions when investing in shares for a short-term goal.
If you really wanted that deposit in 44 months instead of 48 months, then instead of aiming for risky 7% returns, you could increase your monthly contributions by just $46 a week. By just increasing your monthly contributions by $200 a month, you can achieve your 44-month target by investing in safe savings, without taking on any extra risk.
Final Thoughts
There are an increasingly number of publications from seemingly reputable companies that are dispensing extremely bad advice.
Just be careful with what you read and question everything. Even what I write should be questioned.
In this case, the couple got extremely lucky. This should not be understated. I would not recommend that for anyone with such a short savings time frame. There is not enough time to recover from significant losses.
The downside risk is far too great.
Many of you may not have experienced a large downturn in the markets because the last 10 years has been such a smooth upwards ride. But trust me when I say this won’t last forever. There will come a correction and it will be sharp. In fact, there will be multiple corrections and recessions over your lifetime. Just because you haven’t experienced it doesn’t make it less real. It only means that is closer than before.
If you need a personalised investment plan, then get in touch and we may be able to help.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here.