RE vs stock market vs bonds

[Thomas Beyer]

[quote user=housingrental]Timing matters. .. and location .. and interest rates .. and CAP rates .. and in-migration .. and GDP growth .. and sub-location within city .. and government policy .. and job growth .. and transportation improvement to a sub-location ..



I was thinking specifically 2000 - 2010 .. most cities, even those where values dropped 50% .. are higher than 2000 .. as they went up 200%+ from 2000 to 2007 .. say from $200,000 to $600,000 .. and now $300,000 .. yes, you can find selected 10 year periods in real estate in some cities that are probably flat in value ! I am not saying that every piece of real estate in any city will be a good investment !

 

[bizaro86]

[quote user=housingrental] Timing matters


Which is why the fact that the stock market is down/flat over the last ten years makes now a good time to invest in it rather than a poor one, just like lower priced real estate is good for buyers, and everyone loves it when their favourite grocery store has a sale.



The Dow/TSX/S&P 500 all have much great earnings now than they did 10 years ago, so the component companies should be more valuable, on average. However, the prices have declined/stayed flat, on average. This suggests to my mind that the value is better.



After all, which condo would you buy if offered two idential properties, same building/view/floor/rent/cashflow/condition. The higher or lower priced? I would buy the lower priced unit, myself.



For a long term investor (Brett's 10 years or more) well selected stocks can be an excellent investment if purchased not at a peak, as eventually the market rights itself. (The tech wreck happens when tech stocks are overpriced, and they recover when underpriced) It's exactly the same as real estate really, things find their proper price (intrinsic value) over time. The trick to investing is to buy things below their intrinsic value.



Regards,



Michael

Michael

 

[TangoWhiskey]

There is an excellent body of research showing conclusively that in the stock market long term performance is a function of valuation going in, so Adam's comment that timing matters is bang on for my money. If you want some explanation of that, just google "Shiller p/e 10". The historical average of the broad market P/E level and therefore valuation over a ten year horizon determines the returns ie if its cheap when you buy it probably did pretty good and if it was expensive, well, not so much. Right now is one of the 5 peaks in stock market valuation by this measure. That isn't to say people won't make a pile of money with correct stock picks, but it is to say that people who listen to mutual fund or ETF index marketing will not be happy with their returns ten years from now.

 

[Thomas Beyer]

[quote user=bizaro86]makes now a good time to invest in it rather than a poor one,


is it ?



People who bought stocks yesterday though so too .. or folks who bought last week or 2 months ago or 5 years ago or 15 years ago. The stock market is always balanced, as for every buyer there is always a seller for a sale to happen !

 

[bizaro86]

[quote user=ThomasBeyer]People who bought stocks yesterday though so too ..


Do you judge your real estate investments based on 1 day returns? I bought stock yesterday, and todays drop is inconsequential over a long period of time. As I type this the TSX is at 12,007. I'd be up for a wager it'll be higher than that in 10 years time.



Regards,



Michael

 

[garyyeung]

The often quoted Dow Jones Industrials average does not include dividends.



Look at this fact sheet from the Dow Jones website. Page 3 says only the total return version of the index includes dividends.

http://www.djindexes.com/mdsidx/downloads/fact_info/Dow_Jones_Industrial_Average_Fact_Sheet.pdf

According the that fact sheet the current dividend yield is 2.9%.



The Dow Jones Industrials Total Return Index is up over 60% since 2001. I wonder who's mutual funds are up 60% over the last 10 years. How many money managers are able to beat the real index? Most of them can't even beat the rigged index, which excludes dividends.



That being said the total return of real estate over the last 10 years is probably 250%.

 

[Thomas Beyer]

Assuming that stocks and real estate moves in lock step going forward, on average, with inflation of 3-4%, what is a better investment: a stock or index with an average 2.3% dividend .. Or an apartment building or SF home) with a 5% to 5% yield ? In addition "margin" money costs around 5-6% for stocks and only 3% for real estate. What yields a higher cash on cash return ?

 

[Rickson9]

Apparently even after 80 lessons learned, there are still a lot more to go.

 

[Thomas Beyer]

Apparently so .. It's a life long learning process !

 

[Thomas Beyer]

good to have a diversity of opinion .. however lets stick with FACTS.



Real estate and stocks are correlated, in that a good economy moves up both or a bad economy impacts both asset classes negatively.



Margins interest rate on stocks are NOT prime + 1 .. usually prime + 2 or 3% .. thus as stated 5-6%.



Mortgages, i.e. "margins" on real estate are around 3% today .. 50% of the price of money secured by stocks !!!



Leverage works in both asset classes, it just costs more in stocks AND stocks, on average yield far less.



That was my factual statement.



Show me a stock or mutual fund portfolio that made 50% or even 100% in the last decade, and I'll listen why stocks are better. The only way to make money in stocks is trading, i.e. for a fews minutes/day/weeks/months .. then get out. Some folks are experts at that and made millions.



The second way to make money in stocks is selling insurance on it, i.e. covered calls, i.e. similar to an income producing piece of real estate, you generate income on a continous basis while also attempting to collect dividends or stock appreciation.

 

[bizaro86]

[quote user=ThomasBeyer]Margins interest rate on stocks are NOT prime + 1 .. usually prime + 2 or 3% .. thus as stated 5-6%.


The (average quality) bank owned discount brokerage I use charges prime+1.25% on the very first dollar of margin loans, and it goes down to prime for very large amounts. Fee schedule is here: https://www.scotiaitrade.com/pages/home/fees1.shtml#MR



TD waterhouse charges the same P+1.25%, or P+1% for president's account clients, which requires only 50,000 in the account, iirc.

http://www.tdwaterhouse.ca/products-services/investing/discount-brokerage/types-of-accounts/rates.jsp



Anyone paying prime+2-3% could do better with extreme ease.



Regards,



Michael

 

[Thomas Beyer]

Well I learned s.th .. my margin is indeed prime + 1.25% .. so 4.25% .. rarely used .. but still 40% higher than a 3% "margin" on real estate, also referred to as a mortgage.



So, stocks yielding 2-3% with dividends plus growth with margin costs of 4.25% .. or real estate with a 5%+ yield plus growth with margin cost of 3% .. what is better ?



Why do banks lend only 50% on stocks .. or 2/3 on quality TSX or Dow Jones stocks at 4.25% but lend up to 80% at 3% on most quality real estate ? Because the former is MORE RISKY / MORE VOLATILE !!



And yes, some diversification is good once you have achieved a certain level of wealth .. but not to get there. Bill Gates or Steve Jobs or many others were highly focused.



Let's not confuse wealth creation with wealth preservation strategies !!

 

[garyyeung]

Why does the financial industry use price return indexes instead of total return indexes?



The S&P 500 is a price index and does not include dividends. Thus, understating actual performance. Why do mutual funds use the S&P 500 as a benchmark to compare their performance?

 

[bizaro86]

[quote user=VinceTassone]Also, I disagree about real estate volatility, historically real estate is considered an asset class with sizeable volatilities, you might want to discuss this with your financial planner. Your financial planner will also tell you not to allocate more than 10% of your portfolio into REITs, excluding your place of residence.



A financial planner (most of whom are commissioned financial product salespeople) aren't recommending real estate purchased individually because there is no vig for them.



An individual real estate property competently selected, prudently financed and managed with care can be extremely low risk investment, as the investor has a larger degree of individual control. It's very different than a REIT.



Michael