Again, I don’t want to disparage real estate investing. I know that many investors have made fortunes in real estate.
The fact remains that, every time I approach the subject of real estate investment with acquaintances, I conclude that the real estate market is not for me. I much prefer to invest in stocks.
Why?
On the one hand, I believe that stock market returns are more attractive in the long term than real estate in general. As we know, historical stock market returns are nearly 10% per year on a compound annual basis. It may be possible to do as much, or even more, in real estate, but it would probably not be without increasing the use of financial leverage, which significantly increases risk.
Furthermore, I believe that stock markets allow you to diversify your portfolio across many sectors of the economy. I don’t believe it is possible to diversify a real estate portfolio in the same way. What other type of investment would allow you to invest in a Canadian bank, a convenience store chain, a technology services company, a used car retailer, a national railway, a grocery chain, or software company, all in the same portfolio? Or to diversify your investments among Canadian, American, European, Japanese, Chinese or other regions of the world?
What’s more, I believe that stock market investing is simpler. By investing in a portfolio of a limited number of companies on the stock market, you can simply sit on your hands for years and enjoy the growth of profits and dividends from your companies. To my knowledge, real estate investment requires more work and involves more administrative hassle.
Another advantage, perhaps less important for the long-term investor, is that the stock market is significantly more liquid. An investor needing short-term liquidity can quickly sell part of his stock portfolio. Real estate investments are more “fixed”.
I am likely biased – some will say I am preaching for my parish! I am still convinced that stock market investments, if done correctly, provide a better risk-return ratio than real estate, besides requiring much less work and involvement. Personally, I like knowing that some of the best business managers in the world are working for me full time to increase the long-term value of my companies.
What is your opinion?
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