So what is the best way of investing this money?

Option 1

Banks

Considered by some the safest option: "at least you can't lose it, and you get some guaranteed increase in value" usually goes the argument.

Money in the Bank - assumed return: 4%

Now $20,000 1 Year $20,800 5 Years $24,333 10 Years $29,605

So, after 10 years, you've made virtually no progress at all, especially when you consider the effects of tax and inflation.

Option 2

Stocks and Shares

Now over the last 10 years, although admittedly not in the last 4 years, the stock market has been very popular. However I cannot accept it is a better bet. When I read that the stock market is a better bet over the next 2 years as it will go up by 15% a year, as opposed to the property market that may go up by 5% a year, this does not take leverage into account and so paints a very distorted picture!!

I will show you why. It's hard to say what sort of return you might get on the stockmarket, but let's say you get 12% a year for the next 10 years - very unlikely, but let's just go with this. So, if you could beat the odds and get a 12% return every year...

Money in the Stockmarket - assumed return: 12%

Now $20,000 1 Year $22,400 5 Years $35,247 10 Years $62,117

Now that's a big increase on sticking the money in the bank, but clearly is not guaranteed. But can you do better?? I think you know what I'm going to say?!

Option 3

Property

One of the great things about property is it enables you to leverage the $20,000 to purchase a $300,000 investment property (in other words, borrow the remaining $280,000 from the bank). Now, say the property market slows down to an average of only 6% return for the next 10 years.

Money in Property - assumed return: 6%

Now $20,000 ($300,000 property value $280,000 mortgage) 1 Year $38,000 ($318,000 property value $280,000 mortgage) 5 Years $42,725 ($401,468 property value $280,000 mortgage) 10 Years $50,411 ($537,254 property value $280,000 mortgage)

Make sense? So you make 6% increase on the full value of the property, not just the $20,000 which you initially had. This is the power of leverage. In effect you have increased your initial investment 5 fold in 10 years! So even if the stock market increases by twice as much per annum as the property market over the next 10 years, you can make far more money from property.

For simplification, I have not included lawyers' fees, agents' fees or stamp duty. Admittedly buying a property has more additional costs than buying shares, but this would not make a significant difference on your profits.

However, over a length of time, using leverage to good effect and using all the other skills you need when buying property, property is by far the best investment for the majority of individuals.

The figures I have used have been very conservative, many individuals are making far more than this on property.