I spend a ton of time reading through articles on BiggerPockets.com and SeekingAlpha.com and all too often, individuals are significantly biased towards one investing strategy over another.
In particular, it seems that the "average" investor, if there is such a thing, is either 100% pro stocks or 100% pro real estate.
Each person has a million reasons for why one is better than the other. Chances are, if you're reading this article you probably have your own bias towards one of these asset classes.
I witnessed this mentality when I worked as a financial analyst at Vanguard and, honestly, it rubbed off on me quite a bit at the time without even noticing it.
We are who we hang out with the most, right? Obviously, at Vanguard, the bias is towards stock market investing and even more specifically, index investing.
Most of the employees you talked with would give you the same reasoning, "it's hard to beat the market and a waste of time, so just buy index funds", or "market returns are always better than real estate in the long term."
I'm here to tell you that investing in both real estate and the stock market is the way to go. Not one over the other.
They both offer their own set of distinct advantages that will help you achieve wealth and financial freedom.
They also both have their own set of disadvantages, which only highlights the necessity of becoming invested in both strategies to diversify away from those disadvantages.
Your home will not be your biggest investment, unless you let it.
I really need to put this to bed. I can remember from the beginning of time people telling me that "my house will be my biggest investment" and it literally makes me cringe.
(On a side note, I had a car dealer tell me that my car would be my second biggest investment behind my house and I almost laughed in his face.)
This idea is so commonly accepted that no one even challenges the idea. People just buy as much house as they can and as soon as they can afford it, because "that's just what you do."
That is the sole reason it becomes someone's biggest investment, because they follow the status quo.
Let me be clear, if you want to build real wealth and ditch the status quo, then don't follow the conventional wisdom of buying a house as soon as you can.
In fact, I would delay buying a house as long as possible.
There are so many other places you can deploy your money that will pay for whatever future house you want.
You know another saying I truly hate? "An investment in a house is less volatile than a stock market investment."
No. WRONG. Let me put it this way; if you're home traded on an open market like that 1 share of Amazon stock you own does, then I bet you anything you would check it every single day just like people do with their stocks.
Can you imagine this situation? You know that people would be trying to day trade their homes. It would be another way to make a "quick buck" just like the stock market.
Fortunately, the real estate market doesn't work that way and people can't day trade their homes for their own sake. But, you have to understand it's just a mental switch.
Stocks are nothing but ownership stakes in individual companies. Those individual companies are all producing product, providing services, and hopefully generating earnings and creating real value in the marketplace.
Really, if you think about it, it's pretty insane that stocks trade on the open market on a daily basis.
Companies are meant to be long-term investments, just like your home, so why have the need to trade in and out of them every day?
People are biased towards homes because they own them for 20-30 years, without being able to check their trading price every day.
As a result, they get to the end of 30 years and found out their home went up in value!
That's nothing spectacular to write home about, though. Of course it went up in value, just the power of inflation should do that! In fact, you will be lucky if the price appreciation on your home actually kept up with inflation over that period of time.
Fortunately, for you, real estate tends to be a pretty good long term inflation hedge, but long term stock returns tend to do even better.
If you approach stocks with the same attitude, that you're going to own this company for 30+ years and you choose your investments wisely, then I guarantee you after 30 years that investment is also going to be worth a lot more money.
Chances are, those investment gains will be significantly higher than the investment gains you experience on your home.
In fact, over the last 40 years or so, stock returns beat housing price returns very handidly.
Take a look at what Kim Iskyan, Co-Founder & Publisher, of Stansberry Churchouse Research has to say about it:
"For the U.S. market, the results aren't even close. The S&P 500 has averaged an 8 percent annual return since 1975. U.S. house prices have earned just 4.8 percent a year since 1975. In fact, over nearly every decade, the S&P 500 does better than housing. The only decade when housing did better encompassed the recent housing bubble, from 2000 to 2010. Even accounting for the sharp decline in the last two years of that period, U.S. housing prices still outperformed the S&P 500 for the decade. So far this decade, the U.S. stock market is ahead once again. And for the past 40 years, it would have earned you almost 4 times as much as U.S. residential real estate."
To read Kim's full article, follow this link https://www.quora.com/What-is-the-historical-return-of-real-estate-vs-stock-investing-Which-one-is-better. https://fred.stlouisfed.org/series/CSUSHPINSA
Now if you are reading this article you probably get the feeling that I'm pro stock market vs the real estate market. That's simply not true and I want to explore the other side of the argument, too.
There is a really great research piece put out there called "The Rate of Return on Everything, 1870-2015."
This paper takes a look at the 145 year history between 1870 and 2015 and actually concludes that real estate is the long term winner when you factor in rents collected on real estate investments.
I highly advise you take the time to read this full paper. You can read it here https://www.frbsf.org/economic-research/files/wp2017-25.pdf. Also, out of respect for the hard work they performed on this piece, I want to use their suggested citation: Jordà, Òscar, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, Alan M. Taylor. 2017. “The Rate of Return on Everything, 1870–2015” Federal Reserve Bank of San Francisco Working Paper 2017-25. https://doi.org/10.24148/wp2017-25
That drives my point home further, though. Notice it said "when you factor in rents collected on real estate investments."
Your home does not collect rent and is not an investment. Sure, it might appreciate in value over time and you might make money on it, but to bank on that outcome is foolish.
You would be much better off by investing in a few rental properties and the stock market before your first home. Then, when it is time to buy a home, make a modest purchase.
When your investments have scaled enough to afford a nicer home, do it then when your passive income will pay your mortgage!
What really makes real estate interesting is the ability to use creative financing and debt to fund your property purchases.
This is what really juices the returns on real estate to be competitive with that of the stock market.
Check out my article on why you should be house hacking to see just one of those creative strategies.
You can also invest with debt in the stock market, but it's risky and not set up for the long term investor to do so. They call it investing on margin where they charge high interest rates that negate most of the advantages of borrowing.
I have long believed that if you could get a "30 year mortgage" on purchasing a solid index fund then that would be a no brainer, but no one has created that product yet.
Vanguard, can you help me out?
My main point is that you shouldn't allow your personal residence to become your largest investment in life. Instead, figure out ways to invest in the stock market and real estate creatively to provide passive income that will pay for your "forever home."
A home is what you make it and it's more about the people within the home than the home itself. Otherwise, it's just simply another structure and it should have no meaningful emotional attachment.
Therefore, you should allow the investments in your life to pay for the home in which you and your family choose to live. Don't become a slave to your home financially just because that is the normal thing to do.
You can do better.
I have seen way to many friends fall victim to this status quo of spending too much on a home.
I've heard all of the typical excuses, but there is so much more to be desired out of achieving financial freedom first.
Benefits of Investing in both Real estate and stock market
Diversification
I don't think I need to elaborate on this point very far. It's obvious that having investments in both real estate and the stock market is going to give you some diversification benefits.
Real estate has been a great long-term hedge against inflation and if you have a rock solid portfolio of rental properties spinning off cash it can get you through any stock market down turn.
In addition, there is a lot of academic support out there that suggests real estate is relatively uncorrelated to stock market returns.
That's a huge advantage because selling in a stock market down turn is the absolute worst time to be selling.
That is exactly when you should be buying. Use that real estate income to buy more stocks!
Each asset class can fund each other
I touched on this a second ago. If you are earning a good amount of rental income, why not use the classic personal finance principle of paying yourself first and use some of the steady income to dollar cost average into stock investments?
Don't know what dollar cost averaging means? Check out the definition here on Investopedia. Then do yourself a favor and save Investopedia to your favorites bar.
On the flip side, if you are earning a good amount of dividend income, why not use some of that income to fund down payments on real estate investments?
You can really see how these different investment approaches can fuel each other over time. The icing on the cake would be if you have a job that you truly enjoy doing so you don't have a need to quit your job.
Eventually, your investments will be doing so well that you could retire significantly sooner than the average retiree, but if you really enjoy what you're doing, why not continue to work and give your investments that additional fuel source?
Tax benefits
I'm by no means a tax expert, but it only takes common sense to realize there are tax benefits to investing in both the stock market and real estate.
One tax benefit in particular is depreciation in real estate and business assets.
This one has been crucial to my personal financial situation. Typical real estate investments need to be depreciated over long periods of time based on current tax code.
However, my portable storage units can be depreciated over much smaller periods of time such as 5 and 7 years.
In my current phase of life where I'm in the acquisition mode and focusing on increasing my income, the depreciation on my real estate and storage investments is paying huge dividends on the back end.
There are also all sorts of tax advantaged stock investment options, but those are outside the scope of this particular article.
It's important that you develop a good relationship with a CPA. Fortunately, for me, one of my best friends is an A+ CPA with a very respectable firm out of Erie, PA.
Even with my advanced financial background and training, I choose to have a CPA manage my taxes because they are more focused on taxes.
I could become a CPA if I wanted and study tax code, but frankly I don't want to. That doesn't mean it's not extremely important, though. The sooner you get a good tax professional on your side, the better off you will be.
Options
When you achieve financial freedom you get more options.
You have the option to take a lower paying job that you enjoy more because you don't need the money.
You might have the option to leave your job and travel full time with your family because you don't need that steady work income.
The possibilities are endless. If you invest in both the stock market and real estate then you have more options to realize those dreams.
Maybe the income from your real estate investments will prevent you from having to sell stock at untimely points in time or maybe the liquidity of your stocks will allow you to take advantage of a real estate deal you might not otherwise be able to.
Another area I have experienced benefits in from investing in both asset classes is when I go to the bank asking for money.
I invest in my businesses and real estate with debt. The excess cash I earn from my job and investments I plow into stock investments.
As a result, my overall equity position and net worth is in constant rise. Banks see that large stock position and know that I can easily weather a down turn and therefor they are much more likely to loan me money and at favorable terms.
Income and Appreciation
This is what we are all in the game for. Everyone makes investments for income and appreciation, right?
Well both the stock market and real estate provide avenues for accomplishing both income and appreciation.
Typically, your stock investments are going to spin off less income than a profitable real estate deal, but those stocks are more likely to see appreciation over time.
I, for one, do not invest in real estate in my area expecting price appreciation. I live in a small economically depressed town. However with that being said, I can get properties at great prices for that reason.
That allows me to purchase multifamily properties with healthy cash flows after all expenses for great cash on cash returns. If you're living in a city, it's hard to acquire those sort of assets at a reasonable price.
On the flip side, I aim for appreciation in my stock investments. I'm only 26 and have a long time until retirement. I focus on investing in quality mutual funds and ETFs that are likely to grow significantly over time.
Keep reading below to see exactly where I invest my money and make sure to check in often on my income reports and net worth reports so you can see exactly where I'm investing my money.
Active & Passive
Stock market investing can be very hands on or very hands off. I consider myself a mixture of the two, but I notice myself getting more and more passive with it every single day.
To further add, let's not forget that there is real value in saved time and passivity. Both of those things can be achieved by selecting a few rock solid long-term investments up front and then automatically adding money to them every single paycheck.
That leaves you time to focus on increasing your income and building your compounding machine.
The fact of the matter, like anything else in life, if you want to outperform the stock market you need to invest a significant amount of your time and energy. It should be what you "do" every day.
Even then, the odds are pretty against you when attempting to outperform the general market. Just think about it, there are millions of investment professionals out there where their sole job is to understand and attempt to beat the market.
They spend their entire working hours attempting to do this.
So you really need to ask yourself whether you really love it or not. Can you picture yourself sitting around every single day reading and researching endlessly to try and find the next great stock investment?
Even then, there's still no guarantee you are going to be successful at it.
If you can't answer yes that question, then you should be passively investing in the stock market, because otherwise you are going to get run over.
Now don't get me wrong, I'm a firm believer you can beat the market and Warren Buffett is literally one of my hero's. I do think it is getting harder and harder to do and I think you can still attempt to do so, passively.
I know this might sound like I'm contradicting myself, but what I mean by this is there are great mutual funds and ETFs out there that do beat the market and consistently! They are rare, but they do exist.
I know I sound like a broken record, but I don't overcomplicate things and I use a mixture of the two strategies. I invest in a few passive index funds, I invest in a few active mutual funds, and I invest in individual self-storage REITs because that is an industry I know and I'm confident in. That's it.
To add further clarity and transparency, here is exactly what I invest in on the securities side:
MusclePharm (MSLP) (lol - so much story behind this stock. I still hold it today as a lesson.)
Within my retirement accounts:
***Special Note, it seems like I have a lot of funds here, but the reason is because I switched jobs by leaving Vanguard and starting my insurance position. The first 4 Vanguard funds listed above are funds I had in my retirement accounts while at Vanguard where I had special access that I no longer have. For that reason, I still maintain that separate 401(k) account at Vanguard instead of rolling them over into an IRA. I can no longer contribute to those funds, but they will still grow and compound over time. Plus, I now have a new retirement account at my new job. The rest of the funds in this section are the new funds I have available to me in my new 401(k) account.
Real estate investing can also be very hands on or hands off, however I think real estate tends to be much more hands on, especially at first.
Once you build up a portfolio of real estate investments you could hire a property manager. Be careful with this, though, because hiring a property manager is costly, so you will need to underwrite all of your deals carefully to ensure you are still earning adequate returns.
That's a big mistake that real estate investors often make up front. They are excited to get into a deal so they don't factor costs like repairs, capital expenditures, and property management expenses into their numbers.
For real estate, I'm currently house hacking my residence by living in one side of a duplex. If you don't know what house hacking is, be sure to check out my article on Why Millenials Should House Hack.
I'm also expanding my real estate portfolio through my self storage business, Boxit-N-Lockit. I recently just purchased an 11 acre piece of property where I will be expanding.
Both outperform bonds over the long-term
Let me be clear, I'm not a fan of bonds or investing in fixed debt at all. The statistics prove that over long periods of time that returns in the stock market and real estate smash returns in bonds. For that reason, I will not invest in bonds.
I understand they have a lot of merit in someone's portfolio, just not mine. Everyone is different, but the way I view it is if you are saving and investing diligently in your early years you will be so well off in your later years that you will not need the low volatility that bonds offer.
Your stock and real estate investments will be spinning off so much passive income that you won't be worried about the value of your investments.
I also understand that bonds offer portfolio diversification, but you can achieve diversification other ways (by investing in both stocks and real estate) and never forget that you can be OVERDIVERSIFIED.
So many financial professionals out there preach the value of diversification, but they forget the value of diversification beyond about 30 individual holdings is significantly decreased marginally.
In other words, the benefit that diversification brings you after 20 or 30 individual investments is increasingly less valuable with every new investment thereafter. It's value diminishes with more and more holdings.
In Closing
Honestly I could talk about this forever, so I'll do you a favor and break this apart into more future articles.
The point is, don't become too biased towards one asset class over another. There are so many different ways to invest and create financial freedom for yourself.
Take time to understand several strategies and asset classes and invest in what you know. Staying within your circle of competence is so important.
Choose to be different. No matter your circumstances, there is no better time in the history of our existence than now for creating financial freedom for yourself.
Life is far too short to go through it living like everyone else and trying to meet their expectations.
Money is not everything, not even close. Money is important, though. It holds the power to free you from the things that keep you strapped down and live the life your truly want.
Quit making excuses and do what's necessary to get there. You, your family, your friends, and everyone around you will thank you for it later.
Thanks for reading everyone! Get a conversation going below in the comments section. What are your favorite asset classes and why? What steps are you taking today to achieve financial freedom?