Long Run Investments – Stocks vs. Real Estate
By Kevin Dufficy
Should a long term investor who started in 1985 have stayed in real estate or the stock market? What should an investor today be doing? People who sold their real estate and invested the proceeds into the stock markets just before 1987 got wiped out. The cycle was repeated in 2001. But in 2007-2008, investors are faced with the dismaying prospect of seeing their gains being wiped out in the real estate market. Even so, an investor who has stayed put, whether in real estate or stocks, stands to make a profit over the same period after factoring in inflation.
Long run investors who stick with their investors invariably make a profit, whatever the rate of return. A discussion of long run investments would be incomplete without mentioning the Wizard of Wharton, Jeremy Siegel, and his book, ‘Stocks for the Long Run’. Lawrence Kudlow asked him this question on his blog, “Who does better, long-term investors or traders? Siegel said it’s a no-brainer - Definitely long term investors. He conceded that there’s a very tiny few who can buck the trend and succeed in the short term game. But on the whole, it’s no contest, you want to be a long-term investor.” The only question is, would the appreciation be higher in real estate or stocks?
With stocks, the uncertainty comes from the performance, or lack thereof, of specific stocks. It’s quite possible that a massive investment in a company which was rock solid might be worthless after a decade. With real estate, the complexity comes from the fact that real estate investments need to factor in maintenance costs and utility bills, along with a much lower rate of returns over the same period, as compared to the stock market.
With a diversified portfolio, the uncertainty over stock performance can be eliminated. But there’s very little you can do to increase the returns from real estate investments. While real estate would yield average returns of about 10% over three decades, the S&P 500 has risen over 200% since 1970.
The only way to resolve this issue is to consider real estate as property – A place to stay in, or as business premises – rather than as an investment. You save on rent, get tax benefits and the value appreciates over time, regardless of location. Once you have your property requirements fulfilled, it is more advisable to stick to the stock market for long run investments. Thus, in summary, if you do not own any property at present, investing in real estate is a practical decision with many benefits – Even if property prices are in flux. If you already own a house, a diversified portfolio will easily beat real estate over the long run.
About Kevin Dufficy
Kevin Dufficy is a seasoned financial expert having written articles and blogs on a wide range of financial, investment and retirement planning topics. He has an MBA from UC Berkeley, and a degree from H.E.C., the leading French business school in Paris, France. To follow Kevin's profile, click here.