Would you invest in real estate or the stock market now? If you had a million dollars to invest, where would you put it right now (under your mattress is not an acceptable answer)? Is the stock market safe? As between real estate or the stock market, you know I’m going to say that real estate is safer and more secure in the long run, but I’ll give you two reasons, both of which are rock solid.
Real Estate or the Stock Market
Reason No. 1. Real estate goes up and down, but nothing like the volatility of the stock market, and your 401(k). This past 12 months alone, individual investors like you have lost trillions of dollars in value in the stock market because of economic conditions. I hear retired people saying things like, “My mutual fund is down 30%,” or “We are really worried that we’re going to have to go back to work again.” On the other hand, a home that has lost 30% in value this year (down to $420,000 from $600,000) may have been purchased 15 years ago for $175,000 (as is the case with many people). But that real estate is solid, and still an excellent long term investment. As a matter of fact, in my area homes are only down 5% to 15%, depending on the precise location and features.
Real estate or the stock market? While a person’s basis in a mutual fund might be significantly less than its current FMV (so they are still ahead of the game and haven’t actually lost money), just like the home in my example, some mutual funds are closing their doors, because the management fees now exceed the total return. When that happens clients are suddenly stuck with penalties for cashing out tax favored funds. What’s better than a poke in the eye with a sharp stick? Answer: Getting your retirement fund cashed out at the bottom of the market, and owing a capital gains tax and possible penalties for early withdrawal.
Let’s face reality here. Investing in single family homes (or small office buildings) where your name is on the title, or the name of your family trust or other wholly owned entity, is so much safer in the long run, there is almost no comparison. But wait, there’s more.
Real Estate or the Stock Market
Reason No. 2. Real estate cannot go “poof” and just disappear on you after years of owning it. ((Of course, for those who over leveraged and are getting foreclosed on, that’s a horse of a different color.)) As if market conditions and the threat of a serious depression are not enough, what if your stock investments and your hard earned retirement funds could just go poof and disappear? Guess what? It’s been happening. Remember Enron? About a five years ago I wrote,
Consider the following companies are just some of the major companies involved in either accounting fraud or corporate fraud of various kinds:Adelphia, AES, Duke Energy, El Paso, Merrill Lynch, Reliant Energy, Rite Aid, Parmalat, AOL Time Warner, Dollar General, PNC Bank, Cendant, Citigroup, Computer Associates, General Electric, ImClone, Peregrin, Xerox, Bristol Myers, HPL, JP Morgan Chase, Kmart, Lucent, MicroStrategy, Network Associates, Tyco, Enron, Global Crossing, Halliburton, Omnimedia, Merck, Qwest, Sunbeam, and there are many more, including major accounting firms and major stock brokerage houses.The losses associated with these companies is in the billions.These are losses suffered by millions of hard working Americans.These losses have nothing to do with a market that turned down.These losses have nothing to do with our economy or investing principles.These are losses people have suffered because of corporate and accounting fraud.
When I wrote this originally, the date was December of 2008. I wrote then that we have the biggest fraud in history exposed by the admission of the prior head of NASDAQ. “The arrest of investment manager Bernard Madoff on charges of running a $50 billion “Ponzi scheme” may be only the beginning of the legal saga involving the Wall Street veteran.” Read Legal Experts See Wide Fallout From Madoff Case. The implications of this massive Ponzi scheme are going to devastate mutual funds and millions of people. Among those who invested with Madoff: Tremont Capital lost hundreds of millions; Maxam Capital Management has combined losses of $280 million; Fairfield Greenwich Group may have lost $7.3 billions; Fix Asset Management may have lost $400 million; and the list goes on.
The stock market used to be a place where good hard working Americans could invest their money with dollar cost averaging over a 20 or 30 year career, and end up with a nice nest egg for their retirement. In every market dip financial advisers have been fond of saying, “Well, remember when you invest in your 401(k) or your IRA, you are investing for the long run. You’ve got to hang in there and ride out the cycles.” That was good then, but now many people are going to have to go back to work because of the crashing stock market, or the fraud that made their retirement fund go “poof,” or both. The trust is gone.
Real Estate or the Stock Market
Why buy single family homes with your money? Safety and long term security. That sounds pretty good about now.
If you have a great financial advisor, you are already safe and secure, but you would be in the minority. There are, in fact, many outstanding financial advisers, and if you have one, count your blessings. Today where would you put your money? Real estate or the stock market?
Last Updated on December 19, 2013 by Chuck Marunde
Fantastic website / I will definitely visit again..
I think that there is a good time to invest money in real estate and bad time. Today is better to be in the money and wait – good time is coming.
When you invest in real estate, it’s something tangible. You can enjoy it, show it to people. For a lot of people, that’s important psychologically. Another advantage is that it’s far more difficult to be defrauded in real estate (compared to stocks) because you can inspect your property, make sure that the building is actually there before you buy it, do repairs yourself … with stocks, you just have to trust the the auditors and management. Using leverage (debt) in real estate can be structured far more safely than using debt to buy stocks by trading on margin. Real estate investments have traditionally been a terrific inflation hedge to protect against a loss in purchasing power of the dollar.
Investing wisely is always good. The question is where to invest wisely. You make excellent arguments in this and other articles on the Sequim Real Estate Blog that diversifying in real estate is a good idea.
It is not a question of “which”, it should be “how much” in both. Putting all your eggs into one basket is never a safe idea if security is the main factor influencing your decision.
I am a past real estate investor but since moving to the Midwest have not been able to find any property that can make monthly cash flow. For that reason I am waiting until the foreclosures work their way through the real estate market. According to the Realtors Association, there is still 2 years of normal supply in foreclosures waiting to happen. That means one must be patient in waiting for a good real estate investment.