In 2017, a group of economists from three different universities across Europe and the US released a paper with an extraordinary set of statistics. They had analysed investments and other financial data between 1870 and 2015 for 16 countries that had witnessed huge economic development during this period. The result? The countries showed a 7% annual return on average on housing, just above 6.89%, which was the return on stocks.
Does it mean that now we don’t need to ponder over whether to invest in real estate or the stock market anymore? Of course not. While historical data speaks in favour of stocks most of the time, and real estate in the case of the new study, the answer really lies in what we want from life in the long-term.
The first step in making that decision is to ask certain questions of yourself. Narrowing down your goals for life will provide the purpose for your investment. In addition to that, evaluating the involvement required are good places to start with. Both stocks and real estate yield a lot of money, have their own risks and can give you a steady income. Let’s take a quick look at the pros and cons of investing in real estate vs stock to help you decide.
Risk is a common factor
Risk is unavoidable whether you invest in real estate or stocks. The stock market has consistently, and unfairly, received a bad rap by being associated with a high-risk factor. It is a given that stock market prices fluctuate wildly every other day. But the wild volatility can still throw an unseasoned investor into a frenzy. Managing investments in the stock market require you to be disengaged and completely rational with no emotional involvement. Most importantly, a bad day when stocks crash should be seen as an opportunity for more investment. After all, stocks are meant only for the long-term.
That said, if your investment rests in one company, then there is the risk of the company going under, taking all your money with it. Investing in ETFs would be a safer bet to avoid this.
Contrary to popular belief, investing in real estate is not any less risky. The subprime mortgage crisis proved that in big, bold letters. While there are multiple ways to invest in real estate including purchasing real estate mutual funds one of the safest options is to stay in the house you buy, which ensures you have full control over your asset.
Investing in time
Time is of the essence both in terms of returns as well as effort from your side. Investing in real estate is considered to be less of a strain than the stock market as you don’t need to monitor it constantly. But it also depends on what kind of property you own. If you own land, for instance, unless you personally supervise or have appointed someone to do so you are at high risk of encroachment. If you are going the rental route, then managing the property can be nightmarish if you have to deal with managers, unruly tenants, utilities and other tasks on a daily basis.
The prevailing theory is that it is possible to earn more money in a shorter term when compared to property, which might sometimes require years to prove its worth. “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes,” Warren Buffett’s words should never be forgotten when considering an investment in stocks. Just like property stocks too need time to show their worth.
Accessing your money
If you think you want your investment within reach, ready to be drawn out for emergencies, then stocks are a better option. You can easily sell your shares in a matter of seconds whereas with real estate it will take a minimum of a few weeks. If you are fortunate, that is. With stocks, you might not have control over their price, but they are easily accessible and will give you some amount of returns.
Spread out your money
Stocks trump over real estate here as well. Real estate is notoriously challenging to diversify because it requires capital. A sizeable one at that. If you have a considerable amount parked in a bank, then you could think of buying two apartments in two different cities, where the real estate market is forecast to do well. You can diversify based on asset class too. For example, buying a unit of commercial space to lease out along with an apartment to rent out would be an excellent way to ensure a solid investment base.
For the rest of us who might not have that luxury, stock markets offer great options to mix up your investments across various industries and markets based on risk profiles.
Conclusion
Time, convenience, and capital play a significant role in determining your investment choice. Alternatively, you also don’t have to put all your eggs in one basket. You could always invest in both real estate and stocks to see which one turns out better for you!
