When it comes to investing, there are several asset classes you can choose from. Institutional investors, for instance, will often plow millions of dollars into government bonds or crypto, while most regular people opt for either stocks or real estate since these are the most accessible.
Attitudes towards these assets, however, can differ markedly. People who love stocks will talk about ‘beating the market’ and making ‘double-digit returns,’ while those who buy real estate will talk about how it is ‘the only true road to wealth.’
For beginners, it can be a little confusing. The way investors talk about real estate and stocks suggests that one is better than the other. That, however, is patently untrue. Both have their strengths and weaknesses, just like any other asset class.
Anyone can point to history as a reason not to buy either type of asset. Investing in real estate in 2007 was probably a bad idea, and you would have been better off putting your money into tech stocks. But, at the same time, buying tech stocks at the end of the 1990s would have been a disaster as well.
Here’s the point: the investments that you buy don’t come with any guarantees. They can perform well, or they can perform poorly. It’s all to do with timing.
The positives and negatives of investing in real estate
The choice to invest in real estate ultimately comes down to the positives and negatives, and how you balance them. No asset is perfect.
Perhaps the biggest reason that the middle class chooses to own housing is that it is ‘comfortable.’ They heard their parents talking about the importance of property when they were young, and so they believe unconsciously that’s how they build wealth. Unlike the upper classes, who tend to learn about the virtues of stocks and bonds from a young age, people in the middle class get the idea that they need to own property. For them, that’s the definition of financial success.
Generally, you shouldn’t make financial decisions based on your emotions. But, in this particular case, it could be the right thing to do. Feeling happy and content with your financial situation is often just as important as actually making money.
Second, real estate is inherently safe. Once you own a 3 gen flat, for instance, nobody can take it away from you. The deed is final.
The same isn’t always true of stocks. Sometimes fraudsters will use complicated financial products to take advantage of you.
Real estate also makes it easier to build wealth through debt. Banks are willing to lend to buyers because the property acts as collateral. With stocks, there are no such guarantees. The value of stocks could fall to zero if the company goes bust, and the bank might lose all its money.
So what are the downsides of investing in real estate? The biggest one is the time and effort involved in actually finding a property you want to buy. On top of that, if you rent your property to tenants, you also have to deal with management issues, such as broken-down boilers.
With stocks, there’s virtually no overhead involved at all. Transactions are incredibly cheap — usually just the click of a button on a trading app.
Real estate also costs money to maintain, while stocks don’t. Most homeowners have to spend an enormous amount of money on bills every month, just to keep their properties ticking over. That doesn’t take into account all of the maintenance costs involved in keeping the place looking shipshape.
The positives and negatives of investing in stocks
Stocks providing some positives versus real estate. But they’re also risky.
Let’s take a look at the pluses first. History shows that stocks are the most reliable method for building wealth over the long-run. It takes time. But if you are willing to invest over, say, two decades, you’ll almost always double your money in inflation-adjusted terms, and sometimes more.
The reason for this comes down to what stocks represent. When you buy a share in a company, you’re buying the rights to a slice of its future profits. And the amount of money that a company can make is virtually limitless, so shares are inherently valuable, and will continue generating dividends for as long as the company survives.
Stocks are also handy for another reason: they’re easy to buy. These days, you don’t even need to go through a formal broker. Just fire up a trading app on your phone and start buying. It’s that simple. It means that the average person can begin trading immediately, without having to have a lot of money in the bank or a formal relationship with a broker.
Investing in stocks isn’t just something for the rich either — another thing that people tend to misunderstand. It turns out you can start your investment journey for as little as 25 USD and go from there. Yes — commissions tend to fall as a percentage the more you invest. But, in principle, nothing is stopping you from making a move immediately.
You can also sell stocks quickly. Thus, if you’re in need of cash, you just get rid of some of your holdings, convert it to cash, and then transfer it to your checking account to make purchases. It’s that easy.
So what are the downsides?
Well, for one, stocks have an emotional side. Investors tend to get very caught up in individual company stories instead of seeing the bigger picture. They want to believe that their positions are going to yield big returns. But usually, they get it wrong and lose money.
A lot of investors also make the mistake of playing it too safe in the stock market. They invest in large blue-chip corporations believing that they will continue to generate profits forever. That rarely happens, and they miss out on the top-performing and most innovative stocks.
So what’s the answer here? Well, it all depends on your overall strategy. Real estate is the best option for some investors, while equities are superior for others.