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 .
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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Chris, I think that real estate is probably the best long term investment you can have for growth. It's not that liquid, but what a way to save for your kid's college or retirement.
Chris, I too believe investing in real estate is a sure fire way to make money. When the market turns around some people are going to see some sizeable profits.
Patricia - you are right. As soon as someone has a baby or around that time, why not buy an investment property for around $60 to $80K (there are plenty of them here), with a 15 year mortgage. During the 15 years, the rent is covering the mortgage payment (and more) and after 15 years there is $60 to $80K in equity, not to mention appreciation which could be an additional $60 to $80K (assuming a 5 percent return a year). It is great forced savings that produces income and appreciation. Basically your renter will be paying for the house for you instead of putting money aside every month in a college savings plan or a mutual fund. I wonder why more investment pundits do not talk about this ? BECAUSE THE FINANCIAL CONSULTANTS DO NOT GET COMPENSATED WITH REAL ESTATE PURCHASES !
Carole - You are right on. Everyone purchasing a property in the last year or so, and now, and in the next year or two will certainly be in the driver's seat. There are some great deals and opportunities now for a buyer that just will not be there when the market shifts.
It is always a good idea to be invested in both. Diversification is important. There are compelling reasons for long term investors to grab some Real Estate at this point. Your friend is probably making a great move.
I have invested in both for many years and personally I have always down better (long term) in Real Estate...
your friend in Charlottesville!
Bill - agreed. Diversification is key. Real Estate certainly is so much more tangible over time. The huge risk with an individual stock (or bond) is that it blows up completely. And you have no control over it. Better bet in the financial markets are diversified mutual funds.
Charles - Me too ! I feel so much more confident in our real estate holdings. Especially for growth and apreciation with less risk !
Christopher,
Thanks for the post. Diversification is important. However, real estate has proven time and time again to be the less volatile of the two.
William - agreed. Just this morning. Lehman brothers announces they are filing for bankruptcy and is down another 80 percent or so for one day. AIG is down about 50 percent for the day. Real Estate investments are looking awesome in comparison to the equity nightmare. Looks like the Dow Jones Industrial Average will hit its lowest point since 1993 ! Ouch.
Christopher and Stephanie:
I think there is a difference between real estate and stocks in a fundamental way.
Real estate is limited, stocks can just be created on paper.
People need real estate as a function of living.
Stock are not a requirement to live.
When real estate fines it sweet spot it will hum again.
The best cure for this crisis is to get real estate back on its feet. That will sure up credit speads.
Richard
Is crazy out there right now with the likes of AIG and WM today. Who knows who will be next ?