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Stocks versus Real Estate - Lessons to be Learned

stockmarket vs real estate ?I think as individual investors we can all come to conclusions which investment classes are most suitable for us as far as meeting our individual goals.   Over time, the debate will always continue and sway back and forth over the question "What is the better investment ?   The stock market or real estate ? "

In times like this, I think it is pretty simple.

Companies like Merril Lynch, Lehman Brothers (LEH), Washington Mutual (WM), AIG, Wachovia to name a few are down 60 to 70 to 80 percent in the last 1 year !  Lehman brothers is down close to 90 percent !  These are all investments that the average stockbroker or investment banker would have promoted as "conservative" or a vital part of a stock portfolio.  This list does not even include a Fannie Mae (FNM) or a Freddie Mac (FRE).

The risk here is even with a 5 stock portfolio, just having one of these equities would have destroyed a portfolio.

Now some will say, these companies do not represent the whole market.  True.... so lets see what the market has done.

In the last year, the Dow Jones Industrial Average is down approximately 21 percent - see 1 year chart .

The Nasdaq is down 15.4 percent in the last 12 months - see 1 year chart .

stocks vs real estate ?Conversely, Toll Brothers is up 20 percent over the same periord !!!  Who would have thought ?  - see 1 year chart .

Either way, outside of California, Florida, Arizona, and Nevada, how many individual brick and mortar homes lost 60 to 80 percent of their value like a Washington Mutual, Lehman Brothers and so forth ?  Further, the average real estate investment property generates cash flow from the rent received.  Are the stock market companies paying dividends that can match the rent received ?  No !!!

I met with a client yesterday who is pulling out $90,000 in the stock market to buy an investment property in Old Kensington (Philadelphia Real Estate).  He told me, "Chris the stock market just has not been my friend in the last 10 years."  I agree, it has not been mine either.  He elaborated by saying he will put the $90,000 (he is paying cash) in this property as the investment will be in his control.  He can touch it, see it, improve it, rent it and so forth.  He can see the neighborhood improving around him.  He knows the average comparable property sells for around $130,000 so he knows he is getting built in equity off the bat.  Can the stock market provide that ?  No !!!   He does not have to worry about, of the $90,000, that his broker will not place more money in the likes of Fannie Mae preferred stock which lost pretty much all of its value one day last week !  Ouch !!! 

This will certainly be a topic to discuss more.  I know diversification is always key.  But over the long term, real estate certainly has to be a sizeable percentage of an investment portfolio.

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Comment balloon 10 commentsThe Somers Team • September 13 2008 04:47PM
Stocks versus Real Estate - Lessons to be Learned
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