Patrick says

You’ve heard this before: Stocks, over time, outperform real estate.

There are many schools of thought on this but one common statistic that gets tossed around shows equities over the past several decades have returned an average upwards of 10% a year, while real estate is in the 4% ballpark. ...

1. Much more liquidity

2. Lower transaction costs

3. Less work

4. More diversification

5. Ability to invest in products you love

6. Easier to protect your investment in a downturn

7. Fewer taxes and fees

https://www.marketwatch.com/story/7-reasons-stocks-are-better-than-real-estate-2018-04-24

In the real world, real estate owners owns all the stocks too.

Ken Fisher also wrote about this. He used as his example a house in San Mateo CA I believe.

My friends were sometimes bragging to me about their capital gains in their houses. I would say "My shares of Apple split 7:1; did your house grow seven bedrooms?"

Of course, houses don't also pay dividends. You can rent a house but it's a bit of trouble and work.

To get the capital appreciation out of your house you must either 1. sell it 2. reverse mortgage it.

The capital appreciation stocks is superior, they are not taxed while you own them, while you pay property tax on the house that you didn't sell yet. If your stock pays dividends, you are taxed on this income of course.

I can make 25 free stock trades at Vanguard, thereafter $2 per trade. The sale of a house costs 6% or so and takes a long time.

You can sell a few shares of stock to raise cash. You can't sell a room/

clambo says

You can't sell a room/

But to be fair, if the market should crash, you can't live in your stocks. Ultimately, there just numbers in millions of brains.

P N Dr Lo R says

clambo says

You can't sell a room/

But to be fair, if the market should crash, you can't live in your stocks. Ultimately, there just numbers in millions of brains.

If the stock market would fall I still have a lot of investments which pay dividends. Stock market fluctuations don't stop people from consuming and the dividends keep rolling in. The stock market could fall significantly but I'm sitting on 300% capital gains and would never need to sell all of my stocks in one year to survive. Therefore the drop would have little effect.

Stock capital gains are actually fueling the real estate bubble in places like Santa Cruz CA. People who work in high tech get stock options and this wealth is used to buy real estate. Of course this irony is lost on about all of the buyers. My friend who sells real estate in Santa Cruz realized it when I told her. "It's true, my house buyers are generally working in high tech and have a windfall for huge down payments."

Houses are fun. It feels like "my castle" and it of course provides a sense of security. It also provides bragging rights. What it is not is a great investment.

clambo says

Of course, houses don't also pay dividends. You can rent a house but it's a bit of trouble and work.

To get the capital appreciation out of your house you must either 1. sell it 2. reverse mortgage it.

The capital appreciation stocks is superior, they are not taxed while you own them, while you pay property tax on the house that you didn't sell yet. If your stock pays dividends, you are taxed on this income of course.

I can make 25 free stock trades at Vanguard, thereafter $2 per trade. The sale of a house costs 6% or so and takes a long time.

You can sell a few shares of stock to raise cash. You can't sell a room/

Investment real estate has much higher dividend yield in the form of rent cash flow.

Investment real estate has the tax advantage of depreciation. An off-setting tax advantage in paper securities trading is not in stocks but in futures contracts. BTW, I do both; "25 free trades" wouldn't last a day for me.

Investment real estate allows for greater leverage than typical broker would allow in an individual's stock portfolio, so can take greater advantage of a bull run. To match the type of leverage typically allowed in real estate, you'd have to trade futures contracts (with attendant risk of being margin-assessed daily if not by the minute, unlike you can hold onto underwater real estate for months or years while collecting rent; markets can be irrational at times). OTOH, paper securities trading allows going short; renting someone else' house is going short in real estate, but that's very limited in portfolio size.

If you are a buy-and-holder, investment real estate makes sense. Paper securities trading allows faster re-positioning during turbulent market conditions and down turns . . . if you know what you are doing.

Stocks allow participation from far away, whether it's on the other side of the continental US or somewhere else in the world. Doing that via real estate would be REITS but those tend to have much lower yield than direct holdings in investment real estate.

P N Dr Lo R says

But to be fair, if the market should crash, you can't live in your stocks. Ultimately, there just numbers in millions of brains.

To the degree that your stocks represent ownership in money-making enterprises, they are not just numbers, but a real claim on the earnings of those enterprises very much like a deed is a claim on the possession of land. The stock price doesn't matter much if the dividends keep rolling in.

The value of land can also fall to zero in certain cases. Detroit was extremely prosperous in the 1950's and land was valuable there. After the riots in the 1960's, values started falling and never recovered. Lots of it is worth even less than zero at this point because it is simply too dangerous to live there.

Reality, the cost of entry into the stock market is much lower. You can begin without borrowing capital to buy your stock investment. $1000 is a minimum for an excellent mutual fund company. Everyone I know who bought real estate borrowed money to do it. If you borrow capital to buy a rental property how is this making you a great yield?

If you assume that the initial investment into stocks and real estate is $500,000 cash sitting in a bank account somewhere, then the yield on real estate may be good.

If you look at only property in large cities, appreciation is closer to 5-6%. When you factor in the tax savings and ability to leverage it, without risk of losing it during a down turn (assuming you're still paying the mortgage). If you're buying with 5% down, that leverage and those returns can be massive.

Leverage means risk though. If you get too close to the edge (your incoming rents only barely cover your outgoing mortgage + maintenance etc) then you can easy be pushed into losing by a downturn.

That's why the banks used to demand a 20% downpayment. The price could decline 20% and it would still be all your loss and not the bank's. Gives the bank a 20% margin of safety.

clambo says

If you borrow capital to buy a rental property how is this making you a great yield?

If an apartment building's rental yield (after all expenses before depreciation) is 12%, borrowing cost is 4%, down payment 20% (5x leverage), the ROI is 8% x5 = 40%. If the building structure is worth 1M, it throws off another $37k/yr depreciation tax shelter, on a $200k initial investment! That's before counting property appreciation. There are no 40% or 20% dividend-yielding stocks (that are not about to go bankrupt and costing you the entire initial investment); stock brokerage accounts for individuals would typically only allow up to 2x leverage on overnight positions. Even if you get a portfolio-margin account (with $200k+ initial capital some brokers would allow PM) with higher margin allowance, you'd be facing margin check every night if not every minute in real time! If/when there is a flash crash or flash spike against you, you'd be screwed. That's very different from holding investment real estate and being able to sit out the temporary market irrationality so long as you pay tax and mortgage, which presumably is lower than rental income when occupancy rate is as low as 75%, which is really low.

For someone only having $1k, obviously buying investment real estate is not an option. I wouldn't recommend buying mutual fund either though at this point, after 9 years of bull market: someone putting in $1k now can easily lose $500 of that in the next 3 years. Save up at least $25-50k first, then decide whether you want to put that in investment real estate or in a trading account that won't lock you up after only 4 pairs of round-trip trades in a week. The primary advantage of security trading is high liquidity, so prepare to take advantage of the high liquidity and get out if your entry point is wrong.

You will not lose an investment in a mutual fund unless you panic and sell it at the wrong time.

Since your reason for buying the stock mutual fund is either 1. capital appreciation 2. dividend income 3. a combination of these, it makes no sense to consider selling the mutual fund in a down market period. You could systematically withdraw some of it after it has appreciated capital. A bond fund pays income.

Buying a stock mutual fund today is fine if you expect to live for 10 years or more. If you seek income, or a combination of them, there are funds which have dividend paying stocks. If the stock market dips people will still be consuming, producing profits and therefore dividends.

As capital appreciation investments, stocks are better than houses. As income investments, not so much.

I have my own personal "bull market" since I began investing in 1983. It's convinced me.

Reality says

Even if you get a portfolio-margin account (with $200k+ initial capital some brokers would allow PM) with higher margin allowance, you'd be facing margin check every night if not every minute in real time!

Agreed. But that's crony capitalism/socialism right there. Incredible leverage is given to real estate investors and a "tacit" notion that they will be bailed out if things go south, one way or the other. Leverage should be the same for any type of investment/speculation. The only reason real estate can be so lucrative is that it's even more politically protected than the general stock market (which carries a lot of 401Ks). This is a continuously yuge bubble concern and we're nearing one again.


Reality says

Save up at least $25-50k first, then decide whether you want to put that in investment real estate or in a trading account that won't lock you up after only 4 pairs of round-trip trades in a week. The primary advantage of security trading is high liquidity, so prepare to take advantage of the high liquidity and get out if your entry point is wrong.

I would not recommend real estate now, we're definitely reaching a blow-off top. Stocks only if you do good research on select long term bets or if you can trade long and short as short positions will become more lucrative again at some point. The liquidity is def. an advantage, but with real estate you can try one of the new 5% or less down scams again and just walk away if it goes south. Whenever you buy property put as little down as possible - unless it's a buyers market and you can get a huge discount for cash - and ride the leverage at the expense of the taxpayer in case it fails - it's the American way of the housing market ;)

Although your 7 reasons are fine, you must factor in rising rental markets if we are going to have a genuine conversation about real estate vs stock market.

Everyone has to live somewhere.

BayArea says

Although your 7 reasons are fine, you must factor in rising rental markets if we are going to have a genuine conversation about real estate vs stock market.

Everyone has to live somewhere.

Agreed. Also it's local, some markets will still be decent because people get pushed out of too expensive markets. Colorado (and Nevada some) has appreciated quite a bit since they are taking all the CA "refugees".

Buying Is Easy, Selling Is Hard. Investors are so bad at knowing when to give up on a holding, they’d be better off doing it at random.

Princeton economist Burt Malkiel is famous in investing circles for suggesting that blindfolded monkeys throwing darts at a newspaper’s stock pages could build a portfolio that would do just as well as one chosen by expert money managers.

A recent academic study suggests that the blindfolded monkeys actually may do even better than the average institutional investor. However, the monkey traders should be given the darts when it’s time to sell holdings, not when deciding what to buy.



The researchers looked at more than 4 million trades among 783 portfolios from 2000 to 2016 and found that stockpickers actually showed skill when buying. However, the sales by these institutional investors cost them as much as 100 basis points, or a full percentage point, of yearly returns compared with a no-skill strategy of simply selling holdings at random, according to the study Selling Fast and Buying Slow by researchers from the University of Chicago, Carnegie Mellon University, MIT, and portfolio analytics firm Inalytics Ltd.

The study concluded that one of the likely reasons for the discrepancy was “asymmetric allocation of cognitive resources.” Translation: Investors spend way more time analyzing what to buy than what to sell.

Monkeys with darts would have one big advantage over human fund managers when it comes to selling. The animals wouldn’t get emotionally connected to the stocks in their portfolio. Some professional investors know they have this kind of behavioral bias and take steps to correct it. Their methods can be pretty complicated.

At New York-based Edgewood Management, primary coverage of a stock holding is taken away from the original portfolio manager and given to another member of an investment committee when certain criteria are met, such as two straight quarters of disappointing earnings. At Sierra Mutual Funds in Santa Monica, Calif., Chief Investment Officer Terri Spath advises portfolio managers to employ trades known as “trailing stops,” which are standing orders to sell any stock that falls by a certain percentage. Jerry Dodson, founder and chairman of Parnassus Investments in San Francisco, says he tries to determine each stock’s intrinsic value, then buys shares when the price falls to 67 percent of that value and sells when they reach 100 percent.

Dodson has had good results lately—his $4.1 billion Parnassus Endeavor Fund has beaten 91 percent of similar funds over the past five years—but it’s hard to know how much of this is because of his selling technique. Decisions to sell in general aren’t well-studied, especially by investors themselves, according to Michael Ervolini, co-founder and chief executive officer of Boston-based Cabot Investment Technology, which makes software that analyzes equity portfolios.

His firm has scrutinized almost $3 trillion in investments and found that one-third of portfolios exhibit what is known as the “endowment effect,” or a tendency to hold on to a winning stock for too long after it stops outperforming. His work leads him to agree with the main takeaways from the academic research, he says: “Managers know more about, and are better at, their buying and know less about, and are not as good at, their selling.”

“The way people learn to sell is largely from the people they worked with when they were young—it’s not calibrated,” Ervolini says. “It’s either folklore or heuristics”—that is, mental shortcuts typically learned by trial and error.

One of Cabot’s clients is Polen Capital in Boca Raton, Fla., which has found success by not selling too often. It runs a growth fund with a concentrated portfolio of only about 20 companies. Over 30 years, portfolios the company has run with this strategy have owned only about 120 stocks, according to Daniel Davidowitz, CIO and co-manager of the Polen Growth Fund. The $2.8 billion fund has beaten 99 percent of similar funds over the past five years.

Davidowitz says he was worried Cabot’s analysis of the firm’s trading might reveal they were holding too long. And it did find that selling decisions were a bit of a drag, costing Polen about 22 basis points per year in the decade through 2017, though in the latter five years the decisions got better, contributing a net positive 32 basis points per year. “What they’ve told us is that a lot of our outperformance comes in the first three or four years of our holding, and then it becomes a lot more mixed,” Davidowitz says. “So what they are telling us is that, as you get longer into a holding period, especially when it comes to companies that have done well, to keep reevaluting the investment decisions more stringently.”

Davidowitz says Cabot’s system lately has been nudging the managers to consider selling shares of technology consultant Accenture Plc, because “it looks a lot like the kind of company that we held too long in the past.” They’ve reevaluated and decided they still like it. “But we understand why we’re getting the nudge,” he says.

BOTTOM LINE - Professional managers don’t seem to give as much attention to selling as they do to buying and could have a bias to holding on to winning picks for too long.

https://www.bloomberg.com/businessweek

Everyone needs a place to live. Childless Hipsters, of which there are so many here in the Bay Area, can couch surf or double/triple up or flit from one rental to another. I was no Hipster but I lived like that myself back in the day, as did my partner.

It's more complicated with schoolagers. Moves are disruptive. That's the reason my partner and I bought our SJ home before we had schoolagers, for the stability. We want their situation to be based on our family dynamics, not the Landlord's whims. For that reason, a personal reason. But, not as an investment. Because it's not such a great investment except for the intangibles.

So many folks go ballistic rationalizing what a great investment their huge ill-liquid asset is, whether it is their Bay Area sh*t-shack or the solar roof on top of it. A savvy investor is more likely to be discreet.

B.A.C.A.H. says

A savvy investor is more likely to be discreet.

Likewise most people, "key word - most", who actually have serious money rarely if ever talk about it on public forums on a regular basis.

Blair County Pennsylvania, Altoona area for example has a ridiculously high number of millionaires plus living there but you would never ever know it just by spending some time there.

Same goes for the immediate area surrounding Rio Vista, California - virtually no signs of anything even remotely resembling wealth and its all old money as well - lots and lots of it.

clambo says

If your stock pays dividends, you are taxed on this income of course.

Don't forget, if you're not a swing trader then you get "qualified" dividends, since the company already paid its share of taxes, and thus, you get a lower tax.

B.A.C.A.H. says

Everyone needs a place to live. Childless Hipsters, of which there are so many here in the Bay Area, can couch surf or double/triple up or flit from one rental to another. I was no Hipster but I lived like that myself back in the day, as did my partner.

It's more complicated with schoolagers. Moves are disruptive. That's the reason my partner and I bought our SJ home before we had schoolagers, for the stability. We want their situation to be based on our family dynamics, not the Landlord's whims. For that reason, a personal reason. But, not as an investment. Because it's not such a great investment except for the intangibles.

So many folks go ballistic rationalizing what a great investment their huge ill-liquid asset is, whether it is their Bay Area sh*t-shack or the solar roof on top of it. A savvy investor is more likely to be discreet.

ha ha, I did not know talking solar pv is flaunting "wealth" , wtf, learned something new today.
Australians are installing a solar roof at the rate of 6 panels every minute(1) - so much envy. lol
Just to add insult to injury, yes, I landlorded for over 20 years. Holycrap, did the rent go up last 5 years in Sacramento!
BTW, my house with a pool and mountain view doubled in value since 2012.
That ought to blow a head gasket ;-)

Edit: (1) 6/m not 1/6m

Yes kt, we get your point. Please find where my post had the words flaunting or wealth. Because you won't find them.

But you will find go ballistic, like you did.

Your point, exactly. And my point too.

Pardon me, I correct myself...so much rationalizing:

Employment projections in environmentally focused ...
https://www.bls.gov/careeroutlook/2018/data-on-display/green-growth.htm

Apr 9, 2018 - In fact, the two occupations that BLS projects to have the fastest employment growth from 2016 to 2026—solar photovoltaic installers (105-percent increase) and wind turbine service technicians (96-percent increase)—involve “green” work.