For a long time, buy-to-let investing seemed like a simple way to secure relatively high returns for your financial future. However, in recent years, punitive tax and regulatory changes have reduced this prospect. Today, if you invest £20k in the stock market, it could offer potentially bigger profits than buy-to-let.
The stock market’s potential is particularly high right now. This is because stocks are in a bear market. History shows that buying stocks at such times produces superior long-term returns. As such, investing £20k in the market today may be a better way of generating £1m over the long run than buy-to-let.
Invest £20k in a tax-efficient Stocks and Shares ISA
A poll of buy-to-let investors by Accumulate Capital, before the coronavirus pandemic emerged, found 37% were planning to sell one or more of their properties.
The vast majority blamed increasing tax and regulation. They said the costs of managing their properties had risen “considerably” over the past five years. In other words, returns from buy-to-let investing had become markedly lower than in the past.
By contrast, stock markets appear to have favourable prospects. Major indexes, like the FTSE 100 and FTSE 250, are trading at discount levels. There are significant opportunities to buy shares in high-quality businesses at low valuations.
You can invest £20k this year in a Stocks and Shares ISA, shielding all future income and capital gains from tax. This favourable tax treatment adds to the case for why shares could offer higher net returns than buy-to-let investment in the long run.
It’s far simpler to invest £20k in stocks
In addition to offering higher potential returns, investing in the stock market is far simpler than embarking on buy-to-let investment.
Very little time and effort is required to open an online share-dealing account. Furthermore, buying shares these days is much cheaper and cost-effective than it once was. As such, it’s economic to invest £20k in a wide range of stocks, giving you a diversified portfolio by geography and industry.
By contrast, the time, effort, and costs of undertaking a buy-to-let investment can be higher than many investors expect. Furthermore, concentrating your investment in one area – even a single property for many small landlords – comes with the elevated risk of having all your eggs in one basket.
The Bank of England recently warned the UK economy is heading for its sharpest recession on record. The Bank reckons the economy will contract 14% this year, due to the impact of coronavirus. And this level of shrinkage assumes the UK lockdown will be relaxed in June.
The housing market has stalled, the availability of mortgage products has fallen – particularly for higher loan-to-value mortgages – and the Bank says it’s “difficult to predict how house prices might evolve”. All this adds to the lack of appeal of buy-to-let investing.
Of course, the coronavirus is also having a negative impact on other areas of the UK economy, as well as many other economies around the world. However, not all businesses have been adversely impacted, and not all countries have been impacted to the same degree.
As such, buying a portfolio of stocks, diversified by industry and geography, could be more appealing than a buy-to-let investment. Now may be the right time to invest £20k in shares to boost your financial future and prospects of making £1m.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.