Asking the question, “what is the right investment for me – real estate or stocks?” is like asking whether white socks are better than black socks. Because the “right” answer is about style, personality and lifestyle.Take a look at a few of the pros and cons of each type of investment below.
Pros of Investing in Real Estate:
- When you invest in real estate, you invest in something tangible. You can look at it, feel it, drive by with your friends, point out the window, and say, “I own that”. For some people, that’s important psychologically.
- It’s more difficult to be defrauded in real estate compared to stocks if you do your homework because you can physically show up, inspect your property, run a background check on the tenants, make sure that the building is actually there before you buy it, etc… with stocks, you have to trust the management and the auditors.
- Using leverage (debt) in real estate can be structured far more safely than using debt to buy stocks by trading on margin.
- Real estate investments have traditionally been a terrific inflation hedge to protect against a loss in purchasing power of the dollar.
Cons of Investing in Real Estate:
- Compared to stocks, real estate can take a lot of hands-on work. But hiring a competent property manager eliminates all hands-on work!
- Real estate can cost you money every month if the property is unoccupied. This is also why it’s important to hire a property management company with an aggressive marketing plan that results in your investment property fully occupied.
- Stocks are far more liquid than real estate investments. During regular market hours, you can sell your entire position, many times, in a matter of seconds. You may have to list real estate for days, weeks, months, or in extreme cases, years before finding a buyer.
Pros of Investing in Stocks:
- Borrowing against your stocks is much easier than real estate. If your broker has approved you for margin borrowing (usually, it just requires you fill out a form), it’s as easy as writing a check against your account. If the money isn’t in there, a debt is created against your stocks and you pay interest on it, which is typically fairly low.
- Unlike a small business you start and manage on your own, your ownership of partial businesses through shares of stock doesn’t require any work on your part (other than researching each company to determine if it is right for you). There are professional managers at headquarters that run the company. You get to benefit from the company’s results but don’t have to show up to work every day.
Cons of Investing in Stocks:
- Despite the fact that stocks have been proven conclusively to generate more wealth over the long run, most investors are too emotional, undisciplined, and fickle to benefit. They end up losing money because of psychological factors. Case in point: During the most recent collapse, the Credit Crisis of 2007-2009, well-known financial advisors were telling people to sell their stocks after the market had tanked 50%, at the very moment they should have been buying.
- The price of stocks can experience extreme fluctuations in the short-term. Your $40 stock may go to $10 or to $80. If you know why you own shares of a particular company, this shouldn’t bother you in the slightest. You can use the opportunity to buy more shares if you think they are too cheap or sell shares if you think they are too expensive. As Benjamin Graham said, to get emotional about stock prices that you believe are wrong is to get upset by other peoples’ mistakes in judgment.