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Seriously?
Individual stocks are risky - stock index funds are much less so. Taking on an acceptable amount of risk for your circumstances is the only way that most folks will be able to have a decent retirement. Stocks do quite well over the long term - 10+ years.
Real estate requires a lot more knowledge - knowledge that people like to THINK they have but don't. You're lucky if you can buy your own house and it appreciates, much less any other real estate.
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Originally Posted by mathjak107
the problem with real estate is it is nice until it isn't . eventually if you do it long enough one of the 3 perils get your tenant . job loss , illness , divorce and their problems become yours .
with real estate generally being leveraged no rent for a few months while evicting can be very painful , plus legal fees .
if there are damages it eats in to your profits .
real estate is not passive , it is a job and if i am taking on a business it has to be a whole lot more profitable to me then true passive investing .
having bought my first rental property two weeks before the stock market crash in 1987 nyc saw it's worst real estate down turn in my lifetime .
when the smoke cleared my 20k equity from the down payment was gone and the property was another 10k in the hole .
a property that falls 5% and is leveraged is a whole lot more damage then just buying stock funds . 100k in a 400k house is a 20k drop if it falls 5% . 100k in the markets is a 5k drop .
after 30 years of land lording it is not something i would want to do in retirement . i rather have totally passive income and just have to deal with riding market cycles .
These quotes are absolutely true!
I love houses. I love architecture. I'm always hatching some plan or project to update mine. I have friends with extensive knowledge of construction/building maintenance, too. In a previous life, I think I have must have been an architect or house builder.
I've also been a landlord, and whenever I see a really nice, big old house that would make a wonderful duplex or triplex (or maybe it's already one), I remind myself why I don't ever want to be a landlord again. In fact, I'm seriously thinking that once the current crop of furrkids declines to 1 or 2, that I'll seriously consider moving into a nice senior condo/apartment and not worry about home maintenance at all.
I sure wouldn't want to deal with tenants when I'm retired. Hell, it would be easier and pay better to just stay working!
In theory, I agree with you. In practice, most of us are really bad at holding onto a 100% stock portfolio for 30 years. The stock market went nowhere for 10 years from 2000 until the end of 2009 and it was a volatile ride. Holding on and adding money to stocks for that long a time requires a level of patience most of us don't have. That's where bonds and balanced funds come in. The better balanced funds outperformed the market over that 10 year period and they did it with less volatility.
Stock valuations aren't as bad as they were in 2000, but they're still on the high side. Owning some bonds helps cushion the blow in bad stock markets, and if you're lucky they might actually add to your returns instead of subtracting from them (although I wouldn't count on it).
I know what you mean, I wasn't brave enough to stay 100% in stock for 30 years either. Though I was fortunate that early on in my career I learned that when you have a long time horizon, you focus on equities, so I always stayed in for at least 70% (but cut that back a lot when I retired). I never looked closely at balanced funds, maybe I should have.
Re the OP's real estate alternative -- having been a landlord for many years, I can say that no matter how much you know or how well you plan, there's always an element of luck when it comes to who ends up as your tenants. And, trying to make money by flipping houses is just market timing of a different sort, requiring as much expertise as investing in the market if you don't want to lose your shirt.
i bought my home in queens in 1987 . it was 169k back then.
today it is worth 550k.
sounds great right ? except had you put 169k in to the fidelity insight newsletter growth portfolio , which i have been using for many decades that 169k today is 3.4 million .
you could subtract out decades of rent , pay the taxes and buy multiple homes today .
everyone's time frame will be different but over mine that is the difference between some plain fidelity funds and real estate in queens in nyc .
i bought my home in queens in 1987 . it was 169k back then.
today it is worth 550k.
sounds great right ? except had you put 169k in to the fidelity insight newsletter growth portfolio , which i have been using for many decades that 169k today is 3.4 million .
you could subtract out decades of rent , pay the taxes and buy multiple homes today .
everyone's time frame will be different but over mine that is the difference between some plain fidelity funds and real estate in queens in nyc .
You're forgetting one major thing though......without a crystal ball putting that amount of money (or any amount of money) in the market is out & out pure gambling......and, a house is something tangible and something that has use (i.e.; can be lived in, house you & your family, shelter from the elements) - even if you don't realize a big ROI when you sell or even if the real estate market takes a dump you still have something real you can live in and bide your time until an upswing.....I don't think Goldman Sachs would offer to let someone camp out in their offices when they lost a bundle in the market and were awaiting a bull run to recover their losses.
You're also forgetting that many don't have the nerve or temperament to leave that investment rolling over & over in the market for 30 years esp. with years in there like 1987, 2001 & 2008, etc......many would have cut and run to get out with what they could & move to cash, into very conservative portfolios or bonds and not realizing the high return you state.
Let's look at the following chart (source: Morningstar Ibbotson).
The blue line is a hypothetical 100% investment in large cap stocks.
The red line is a hypothetical 60/40 investment (rebalanced annually)
The green line is a hypothetical 100% investment in long-term corporate bonds
For comparison’s sake, an investment stashed in the Case-Shiller Los Angeles Home Price Index would have been worth less than half as much as the 100% equity number, at $29.8 million.
To make a fair comparison you must reinvest the implicit rental "dividend" into the real estate market.
I think people don't appreciate how risky it is to put all their money into rentals. Typically they own property all in the same state and even the same city. In addition to all of the risks already mentioned, there is the non-zero possibility of being completely wiped out by some natural disaster they're not insured for.
If you put half your money in stocks and half in bonds, you won't be wiped out unless the U.S. goes "out of business".
A home is a single undiversified asset in a fixed location, which means it carries special risk. There are some studies on home price appreciation for the course of the last several decades that are quite eye opening. As it turns out, from 1975 to 2014 homes in many metro areas actually appreciated at 1 to 2% less than the national average for appreciation. Over the time of living in that home, which possibly could be decades, 1 to 2% slower growth can make a big difference if one is depending on the income from the sale of their home in retirement.
With today's market, algorithms trading and HFT making millions of transactions in very short durations stocks are definitely not suited for small investors.
You can be a lone wolf if you have experience and information but naive folks shouldn't try that.
I think people don't appreciate how risky it is to put all their money into rentals. Typically they own property all in the same state and even the same city. In addition to all of the risks already mentioned, there is the non-zero possibility of being completely wiped out by some natural disaster they're not insured for.
Many people borrowed money so they wouldn't have all their money tied up to the property. In addition after the financial crisis, housing was undervalued by over 30% in many areas. With people losing their house there has been a substantial increase in rental demand. There is a reason why blackstone (a private equity firm) became the biggest private landlord in America. With 2% rental increase every year many people have had higher expenses compared to someone who owns property and has easier access to cheap capital (low interest rate).
But you didn't buy your home for cash in 87 (at least I don't imagine so)
You paid a mortgage for it -- and you also probably invested in the market through your 401K--and maybe through a taxable personal account as well--so you balanced your risk/investment as you could...
Personal example closer to what you mean though, I think--
In 2008 my husband had big capital gains infusion---
We used about half the money and paid cash for new house -- over 400K--and bought before the RE market went south so paid more than house would have been valued in 4-6 mo and borderline what it is valued now after RE fees if we sold...
We did put some of that money into the market in my husband's defined benefit plan--and we stayed invested in our other accounts with what we already had--only did some tax loss harvesting in our taxable account in 09. So we have had gains--but IF we had put that 400K into our taxable account instead of buying the house for cash, we would have seen far more appreciation than with the house itself--even after this recent downturn in the market...
We just weren't confident enough to do that with a dropping market---not knowing how long/deep it might be.
And I don't think my husband regrets that choice---although hindsight being what it is, I do...
people have different resources individually through life at different times . so how you buy an asset can't be part of the equation if you are comparing performance .
it is like no one ever gets the return of an index fund .
we all add money , sell , rebalance at different times as well as have different buy points so the how you aquire an asset can't be in the equation of comaring assets .
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