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Forget buy-to-let! Here’s how I’d invest £20k in 2020 to make a million

The past decade has been highly profitable for many investors in buy-to-let properties. House prices across the UK have benefitted from low interest rates, a lack of supply and high demand among first-time buyers to post strong capital gains.

As such, many investors may be contemplating the purchase of property to boost their financial future. However, with the affordability of property being lower than it once was, and tax changes potentially affecting net returns, now may be the right time to look elsewhere when it comes to aiming to make a million.

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Buy-to-let difficulties

The political consensus towards buy-to-let investing appears to have shifted over the past decade. Tax changes are perhaps the most obvious example of the government seeking to make it easier for first-time buyers to get on the property ladder. Property investors now pay a higher rate of stamp duty on second homes, while advantages such as being able to offset mortgage interest payments against rental income have receded for many investors.

Alongside this, house prices versus average incomes are relatively high. They are towards the upper end of their historic range, which suggests that house price growth may fail to be significantly higher than wage growth over the coming years. The end result could be relatively disappointing levels of capital growth for buy-to-let investors.

Stock market prospects

While the stock market has also experienced a decade of growth following the financial crisis, it appears to offer much better value for money than buy-to-let investments. For example, a large number of FTSE 100 shares trade on price-to-earnings (P/E) ratios that are below their historic averages at the present time. Likewise, around a quarter of large-cap shares have dividend yields that are in excess of 5%. This indicates that they could deliver further capital growth following the index’s 12% rise in 2019.

In terms of the potential catalysts to push share prices higher, an improving forecast growth rate for the world economy in 2020 could cause investor sentiment to improve. It may also enable companies operating across the world economy to experience higher growth rates in their top and bottom lines. As such, buying a range of shares could provide access to a higher rate of capital growth than buying a property – especially with political risk in the UK expected to persist at high levels as Brexit negotiations continue in 2020.

Starting today

With the stock market appearing to offer long-term growth potential, now could be the right time to buy a range of shares that trade on low valuations. Doing so through a tax-efficient account such as a Stocks and Shares ISA is relatively cheap and straightforward. It could produce significantly higher returns than purchasing a buy-to-let property, and may improve your chances of making a million in the coming years.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.