Real Estate and Stocks. Can’t We All Get Along?

real_estate

Just like the Americans and the Russians, or cat and dog lovers, or perhaps the fans of Nikon and Canon, real estate and stock investors can’t seem to ever co-exist. People who love real estate swear vehemently against investing in stocks because they don’t represent any physical object that you can own. That may be true, but investing in stocks means that you are buying the bricks and mortars which make up the company, the people that work there and the product or service that they are selling. With stocks you own a business. Don’t try to convince a real estate mogul that point, it might blow their mind away or you might get some four letter expletives coming your way. Real estate, on the other hand,  is great because if anything were to happen to the value of the property, there is always a roof over your head and shelter is a very important necessity of life.

If it were ever possible, the Noble Peace Prize should be given to the individual that could convince both camps that both real estate and stocks are necessary for a successful investment portfolio. Alas, saving the world from bombs and wars are more important.

Getting Too Emotional

watercoolerPeople love jumping on things that are hot. That’s why it’s called “popular culture”. It’s no different when it comes to investments. When the water cooler chat talks about flipping real estate for huge profits or riding a stock to it’s all time high, everyone gets excited and we all want to get in on the game before it’s too late. People talk about “buying high and selling higher”, though everything you might have learned up to this point always said “buy low, sell high”. Even though it defies all logic, we pile in, see the short term gains and relish in our success. The problem happens when the party ends and we suffer the hangover.  We panic and sell low.  People generally do poorly with their own personal investments, not because we don’t learn about finances, but because we are too emotional with our money.

Stocks get valued on a real time basis. Real estate on the other hand is a lot harder to value because each house can be different, even if they are on the same street. In addition, it’s not like every household gets an appraiser to give a value on their house everyday. Since stocks are more volatile in nature, people tend to shy away from investing in stocks and stick with real estate. Many people relate to investing in stocks akin to gambling in the casino. This is one of the most ignorant statements any individual can make. People who make these statements generally only have a short term view on their investments. Maybe only days or even minutes. The fact is, as a long term investment, stocks can have similar, if not better gains than a house.

Myth: Real Estate Is Better

You might hear everywhere that real estate in Canada is doing amazing and all home owners have doubled the value of their home. That’s a myth. The real estate boards love pumping the good news to home buyers because it gets people excited (note above how emotions get into play). The fact that one house doubles over the course of a few years doesn’t mean that all houses have. According to a recent Globe and Mail article, detached homes in popular cities such as Toronto and Vancouver have risen on average by 43% and 29% respectively over a 5 year period. That’s a 7.4% and 5.3% compounded increase every year for the two respective cities. These are astonishing numbers and amazing returns on any real estate investment. But what have stocks done in the past 5 years?

sp_tsx_5year

The S&P 500 has risen 90.4%. At the same time, the S&P TSX  has risen 38.06%.  For those two major indices in North America, the compounded increase on a year over year basis are 13.7% and 6.7%. Despite all the chatter about rising home prices, stocks have actually grown faster than real estate in the two most popular markets in Canada.  The only issue with many individuals is the recency effect. Since stock markets crashed 6 years ago, people have been reluctant to put money into stocks and would rather put their money into real estate. Though real estate has proven to be very successful, nothing should be taken away from an individual who has invested their money into stocks.  The fact is both investment classes have been very successful and they should both be considered in any successful investment portfolio.

Getting Diversified

Though both asset types vary immensely in what they are physically, this doesn’t mean that they cannot co-exist in a balanced investment portfolio. The problem with individuals are that they see that one thing works and they stick with it. This is problematic, because in the world we live in nothing lasts forever.  Just ask our fellow Americans what happened to their house values in 2008, or perhaps ask the Japanese about how their housing market has been for the past two decades. Stocks market crashes have been well documented. Put all your money in the stock market and you could be reliving the nightmares of the Dotcom bubble bursting, or the fallout of the 2008 Great Financial Crisis.  At any given moment in time, anything can happen to our investment holdings, which is why it’s so important to diversify.

Investment assets generally don’t have the same performance on a year over year basis. Check out the Stingy Investor and you’ll see that the best performing asset type over any period of time will always differ. That’s why it’s important to diversify your own investment portfolio to include not only stocks and real estate, but also bonds, preferred shares and cash. A diversified portfolio has the chance to withstand market corrections in any given one sector better than a focused one.

Staying Committed

Like a good relationship, one sour moment shouldn’t turn you away from staying committed for the long run.  Whether it be stocks or real estate, a single correction shouldn’t make you shy away from investing in any of these assets. The fact remains that in the long run, both assets make fine investment choices. Your own personal investment choices should also reflect this nature. Stick to things that will appreciate in the long run. Don’t worry about the short term fluctuations and the “in” thing. Stick to your own personal goals and let compounding interest do the work for you.

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3 thoughts on “Real Estate and Stocks. Can’t We All Get Along?

  1. Historically stocks have always provided higher returns than RE. Unfortunately, in this stat, most people do not pay for their house in cash – so although your house is only going up 7% a year, your return based on how much capital you put in is much higher.

    A $500K house that goes to $700K results in a $200K profit on whatever the down payment made. If you put in 100K (20% down), you’ve doubled; 25K (5% down) would be 8-fold.

    Of course, not including mortgage carrying costs, insurance, etc. but flipping RE can be extremely rewarding if you know how to. As with any investment, know what you’re getting yourself into.

    • With leverage any gain can be amplified. The same could be said for stocks if you leverage, though it’s highly unlikely a bank would give the same leverage as a house.

      Using leverage for investments opens up a whole new game that is much more complicated and risky.

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