Recently my mom was trying to convince me to buy a house again, and once again I had to tell her that San Mateo is ridiculously expensive and renting costs one half or one third of a mortgage. I have said this about 10000 times already. Yes, the median price has dropped over $100k, but it still costs around $640 per square foot in my zipcode. So I said that investing my savings in the stock market is better at this point, and to this she retorted, “You think it’s easy to make money on the stock market? There has been no returns on the SP500 for the last 10 years while real estate doubled and tripled!”
Superficially, my mom is right. According to Vanguard’s SP500 index fund, the returns for the last 10 years is 2.85%, and that doesn’t even beat inflation. In the same time period real estate prices did double and triple at least in California. However, this doesn’t mean that the SP500 gave no returns during any of those years. If you look at Vanguard’s fund record, the return for the last 5 years is more than 7%, and that handily beats inflation. Most people I know who invest in the SP500 do so through 401ks and IRAs and contribute money as time goes on. So even if the money they put in 10 years ago did not earn money, the money they put in during the lowest years of the market would be earning quite a bit. The only situation where someone would be earning 2.8% on all their money is if they put in all their money 10 years ago and left it there and that is hardly the case with most investors.
Additionally, investors in stocks are not restricted to buying stocks in the SP500. In the last ten years international stocks in South America, Europe, Asia, and Oceania have been performing quite well. Investors could have bought REITs which get their dividends from real estate and participated in the real estate boom. The possibilities are endless. Even in the current down market, it is possible to make money in the stock market.
Ultimately, hindsight is 20/20, and I think my mom is wrong in saying that stocks are the lesser investment because she is cherry picking a decade where real estate appreciated abnormally. Don’t get me wrong, I think it is possible to make money in real estate, too, but worshiping one asset class as the ultimate holy grail is a bit short sighted. I like stocks for their liquidity and hassle-free nature. For example, I never have to mow the lawn of my mutual funds or fix their roofs. If I can get enough return from my funds to come out ahead, then I am happy. Basically, I still believe that having a diversified portfolio of low cost funds is the way to build wealth. Eventually I will buy a house, but I will probably be paying cash and the amount of cash I spend won’t exceed 25% of my portfolio. I would do it this way so I don’t overload my portfolio with real estate.
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4 comments ↓
The 50/50 hindsight thing is the big thing. If my old man had only known to keep the Mickey Mantle baseball cards he put in his tire spokes as kids, he’s be rich too. So why don’t you invest in baseball card? Mickey’s rookie card is pushing 100k now and it was bought for a penny, how’s that for beating inflation?
Stocks are definitely more liquid. I can’t argue with you on that, but real estate has the power of leverage. With a small amount of money you can get money in your pocket each month, increase your net worth and build equity. Plus you actually have control over your investment. You can check out our side in an article my husband wrote recently: http://revnyou.com/December_17_2007_Investing_in_Real_Estate_vs._Stocks.html
Julie, I understand how leverage works. It is basically like buying stocks on margin. In your husband’s article, he didn’t mention that leverage cuts both ways. So now in a declining real estate market people are losing more than 100% of their investments.
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