Before making a decision on whether to invest in real estate or stocks, you must know how they have performed over the last 100-150 years.
Once you know how they have done in certain circumstances over the years, you can figure out which one is going to benefit you the most.
For that, you can also add a few other factors along with “performance over the years” to correctly evaluate which one should you invest in.
The first thing you need to assess is how much you receive in returns from stocks and real estate.
According to the data for the last 150 years or so, it’s clear that residential real estate had almost an average of 7% per annum. Equities are also around 7%. And bonds came in much lower.
Of Risk & Volatility
Treasury Bonds are usually low return and low risk where on the other hand, equities are high risk and high return.
The last century was a roller coaster for the stock market. One year you see a 29% increase and the following year it comes down 18%. That’s how it was.
Residential assets were always the ones to ensure high return with minimum risks.
Entering in Real Estate vs. Getting Started with Stocks
Crowdfunding in real estate is comparatively new. Before the idea of crowdfunding was introduced into the real estate industry, it was difficult to get into real estate without a big amount in reserve. Also, it was difficult to invest in a new property if you had any less than the amount needed to buy that. Even though crowdfunding made it easier these days to invest in Real Estate, before the last 10-12 years, it was really not everyone’s cup of tea.
On the other hand, stocks were very easy to get involved with. People didn’t need a huge amount to get started with stocks which led many new investors to enter the stock market.
So, in comparison, stocks were easier to get into than real estate because people had to have a solid plan and a big pile of money in reserves to get into the real estate industry. Also, this is the very reason why Real Estate is much more stable.
The bottom line is – stocks are easy to get into compared to real estate a decade ago and real estate was and is much more stable than stocks.
Measuring Risk vs. Return, Sharpe Ratios
It might seem difficult to measure risk against return but thanks to William Sharpe’s, ratio that is made easier.
First, you take the asset’s returns and cut out the returns of a short-term, no-risk alternative (such as the US treasury bills). It will give you the additional return from the asset over a -low-risk or risk-free invest. It’s called the Risk Premium. Then you need to simply divide that Risk Premium over your asset’s volatility, measured by the annual standard deviation in value.
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