Long Run Investments – Stocks vs. Real Estate
Savvy investors always look long-term.
“I am standing in the shade today because a long time ago, someone planted a tree.” Warren Buffett
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 were 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 – long-term investors. He conceded that a very tiny few could 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 specific stocks’ performance or lack thereof. A massive investment in a rock-solid company 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, 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 business premises – rather than as an investment. You save on rent, get tax benefits, and the value appreciates over time, regardless of location. Once your property requirements are fulfilled, it is more advisable to stick to the stock market for long-run investments.
Thus, 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.