The above chart is for illustrative purposes only and does not depict or reflect the price or value of any asset class.
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Real Estate or Stocks? 3 Points of Reference
Some folks have a “thing” for the tangible and real estate falls right in that category. People can see it, feel it, and most importantly, reap its benefits. I’ve heard it stated in many meetings that “real estate only goes up.” And to be completely transparent, I do think that real estate can be a great investment. As a matter of fact, I don’t think there are many bad investments out there. I do, however, believe that it’s more about the framing and understanding of an investment that makes a difference.
1. What does history say about real estate or stocks?
Popular blog site Visual Capitalist recently issued a great article that maps the changes in home prices over the last 20 years. As a matter of fact, they even mapped it out for every US city.
It’s a neat article if you’d like to take a look at your respective home town. While some cities fared better than others (many variables to consider), for the sake of simplicity let’s work with averages. From January 2000 to August 2020, the average US home price had an increase in value of 103.4%. Not bad – and that doesn’t account for potential rental income (assuming you’re not using the home as a primary residence).
Over the same time span, the Dow Jones Industrial Average had an increase in value of roughly 141% . On the surface, it could be easy to declare stocks the winner (no surprise coming from the investment guy). But there are underlying differences to consider.
2. What’s the ACTUAL difference between real estate or stocks?
Factoring in potential rental income can tip the scales back towards real estate. A popular phrase I’ve heard from families over the years is that they can “physically see and feel” their investment. Not only that, but they can also see the rental income coming in every month. There is a feeling of comfort and security afforded to them by real estate.
What they don’t see is the price of their property updated every second on TV, apps, and other forms of media like they do with stocks. Ditto for so-called “experts” on TV yapping about the next doomsday. At best, they may get appraisals every few years (or decades) or do a quick search on Zillow to track its worth. Some folks also forget to account for expenses related to real estate: taxes, maintenance, and insurance.
Yes, it’s true that there are expenses related to equity investments, especially if you use an advisor. There are also taxes. However, if more folks treated their stock portfolios like they do their real estate investments: taking the long term approach, letting it “sit” and do its thing, being cognizant of the income coming in (dividend income, interest income, etc), and ignoring the headlines, I think the outlook would be different.
3. Which is better – real estate or stocks?
Neither, both are great. There is no right or wrong and the idea of one being better than the other depends on too many variables for the scope of this article. As with any investment, an investor should understand the nuances of what they are getting into.
Diversification is key and the bottom line is this: the trend lines for both examples (stocks and real estate) are positive. It’s hard to argue with being “up” after twenty years.
