Now that is a good question. The answer is not exactly black and white but I hope to give you something to think about. Let’s break it down into a couple of scenarios.
First, let’s look at the stock market. If we just use the S&P 500 Index to keep it simple we can see a couple of trends. Looking short term the Index from 1999 to 2004 actually decreased 6% but if you look longer term from 1980 to 2004 the Index increased over 1000%.
Second, let’s look at the purchase of your home you live in. Technically this is not an investment if you define it as something that creates income. Robert Kiyosaki (author of Rich Dad, Poor Dad) says that you have to look at your assets and liabilities. If you lose your job does the thing you are looking at “feed you” or “eat you”? The house you live in would “eat you”. There is a payment, taxes, insurance and upkeep but it also appreciates so in that regard it does act like an investment. You also get the benefit of living in it and that is a real advantage. Just looking at it as an appreciating asset the value of the property from 1999 to 2004 increased in value 56% and from 1980 to 2004 it increased 247%.
Not bad if you just take the approach of appreciation or increased value. There is one thing to consider though. The idea of leverage is critical to determining true earnings. Leverage is the ability to purchase the investment by borrowing money. In the stock market that is not possible. If you want to buy $100,000 of stocks it costs you $100,000 plus your brokerage fees. The real estate on the other hand can be had for much less. Let’s say that same $100,000 investment can be had for a 10% down payment so you put in $10,000 plus the loan costs. In the comparison your $10,000 has the appreciation of the $100,000 investment so it produces at 10 times the initial investment so even in the long term your original investment of $10,000 increased at a rate of 2,470% and out produced the stock investment by about 2 ½ times.
The other factor you have to consider is risk. It is possible for the stock investment to decline as it did from 1999 to 2004 and could reduce in value significantly. If you are invested in an Index fund the likelihood of a major adjustment is smaller but still possible. We have all seen that in our 401k funds and other investments. If you are invested in individual stocks then you could see everything disappear. In the case of the house over the last 50 years values have steadily increased and while there is much talk about a decline in the market the truth is that in our area we are still seeing an annual appreciation and expect to see that continue since we have not had the huge run ups in sales price that was seen in other more volatile markets.
I will address the possibility of investing in real estate as an asset (something that will feed you) in a later article so check back but the real value in real estate is its intrinsic value. It does not disappear and become worthless over night and by leveraging the investment with responsible borrowing you can see a huge return, much greater than the stock market.
You can find more on this at my blog at www.realestate.HomeShowGA.com if you are interested. Keep in mind this is not to be considered investment advice but is an example of the type of value real estate has. Consult your financial advisor before putting your money on the table.
- The year ahead – do you want to know what is going to happen??
- Asset or Liability?