Should I Invest in Real Estate or the Stock Market?
As you review options for your portfolio, should you invest in the stock market or real estate? Whether you’re just starting out or looking to bolster your existing investments, consider your goals and risk tolerance. Both the stock market and real estate can offer valuable diversification to your portfolio, depending on your plans. This makes success look different for every investor.
Before we dig in, let’s get the legalities out of the way: you shouldn’t consider this post financial advice. Always discuss your specific situation with your financial advisor.
Stock Market Investment
We often hear news stories of investors making millions getting in on cheap shares of a company that later exploded. Those investors make sensational headlines because they are so rare. And anyone trying to mimic those returns with the same stocks have already missed the boat (sorry, my dude).
You can easily get sucked into the sexiness of headline grabbing hot stocks only to experience a portfolio busting loss. Expert traders cannot manage to time the market any better than AI or the average Joe. The costs of trying to time when to buy at the lowest cost and sell at the highest outweigh the benefits. And yet, many “throw good money after bad” trying to recuperate losses after a bad sale.
If someone simply invests in the Standard & Poor 500 index, they’ll likely see reliable, albeit boring, returns. In fact, investing in stocks and holding them for at least five years nearly guarantees better results than day trading. But as we’ve seen in the market lately, nothing is an actual guarantee.
Real Estate Investment
Investing in rental properties specifically offers a particularly lucrative return if an investor does their homework. With a knowledgeable realtor assisting, buyers can find properties that will increase in value and offer increasingly higher rent rates.
Those who’ve never owned investment property might have avoided it because they didn’t want to have the responsibilities of a landlord. They don’t want to sign up for hounding tenants for rent money or water emergencies at 3 a.m. Valid.
However, with a solid property management company, property owners could treat their investment property much like a stock portfolio. They can “set it and forget it” while a property manager handles day-to-day issues. They only need periodic interactions with the property management company for specific reasons like approving repairs or reviewing tenant applications.
External Factors Impacting Investment Portfolios
Plenty of seemingly unrelated external factors can have drastic impacts on an investment’s worth. Anyone remember the housing bubble bursting in 2008, for example, or the moment Elon Musk announced Tesla would accept Dogecoin? Already volatile stocks like cryptocurrency or those now-defunct subprime mortgage bundles have ripple effects on the entire market, too.
In addition, political unrest or wars like the one in Ukraine have just as much impact on the stock market. And that’s after the repercussions of the pandemic and subsequent global supply chain issues. Anything that can upset the status quo for business can have an outsize impact on markets as investor confidence wavers. Market volatility can make going all-in on a few brands without portfolio diversification even riskier, especially in the short run.
Local, regional, national, and global developments can also impact rent rates as well. So it pays to do your homework. For example, if a major corporation has announced the opening of a warehouse in an area, expect rent rates to rise in the coming years. Likewise, the booming housing market has made renting more attractive to would-be buyers, at least for now.
Performance Variations
Over time (think over the course of a decade or more), the returns can look fairly similar at first blush. Both investments have variations within them, but we’ll use rule of thumb for this exercise.
A good return on a real estate investment should be around 10%. In general, the average stock return is also roughly 10% (over the course of a century). But as we’ve seen recently, any one particular year can have anything but average returns. And, frankly, who has 100 years to wait to see those returns?
Let’s look at that 10% return on the Standard & Poor (S&P) 500 index a little more closely. That 10% headline grabber doesn’t account for inflation – usually 2-3% annually. If you’ve paid any attention to news coming from the Fed, you know this year promises anything but inflation as usual.
In contrast, real estate tends to increase in value, outpacing inflation rates. It provides a relatively stable safe haven from the volatility of other investments. Sure, it doesn’t offer the same adrenaline-junkie fixes as the stock market, but boring offers benefits in the long run.
Again, we’re not offering financial advice, just a way to think about your next investment moves. If you want to learn more about how a property manager and realtor can help you make better investments, contact us! The Realty Medics are the #1 rated full-service property management company in central Florida.
