Investment
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Posted on August 3rd, 2023
When you think of long-term investing, investing in stocks or investing in real estate are likely what comes to mind- and for good reason. When done correctly, they’re both solid choices for those looking to build wealth and secure their financial future.
We’re weighing up the strengths and weaknesses of these long-term investments by diving into historical data and distilling it down, so you don’t have to- because we know your time is precious.
The total US stock market (represented by indices like the S&P 500 and Dow Jones Industrial Average) has shown strong and consistent long-term performance. Over time, investments like total stock market ETFs have generated an average annual return of around 10%. Despite periodic downturns, the stock market has historically proven itself to be resilient and one of the best ways - if not the best way - to create long-term wealth.
Economic growth, corporate profits, interest rates, geopolitical stability, and investor sentiment are among the key factors driving stock market performance. Because of this, stock market returns can vary significantly from year to year. This is known as market volatility, and it's a completely normal part of the economic cycle.
The best way to weather the storm when things get volatile? Sit tight, the market always corrects itself over time. In fact, if you tried to time the market over the last decade and missed just the 10 best stock market days, your returns would have been half of what you would have earned had you not touched your investments at all.
Much like the total stock market, the US real estate market has also shown favorable long-term performance, making it a favorite investment vehicle for those looking to create wealth. According to the S&P CoreLogic Case-Shiller Home Price Index, which tracks residential property values, real estate prices have generally appreciated over time, often only slightly higher than interest rates.
One of the reasons the housing market is so attractive is because of mortgages. A mortgage allows you to commit to a big long-term investment, working with the budget that you have available today. i.e. You don’t need $300k in the bank today to make a $300k long-term investment in real estate.
With real estate, you are investing in a tangible asset, while stocks have no tangible value. Here’s the kicker though, tangible assets require money and effort to maintain to ensure they increase in value. Real estate also has ongoing property taxes, whereas stocks are only taxed upon withdrawal.
The housing market is influenced by factors such as supply and demand, interest rates, economic conditions, population growth, and local market conditions. It's important to consider this variability across different regions, as real estate returns can differ significantly depending on location.
Diversification is an important part of any investment strategy. You don’t want your eggs all in one basket.
The reality is, that many people at the beginning of their wealth building journey don’t have enough discretionary income to invest meaningfully in both property and the stock market, and for most, purchasing a diverse property portfolio is not on the cards. If you had to pick just one investment class, stocks come out on top, as they allow for total market diversification no matter your budget.
Home prices can be opaque and you can’t buy into and sell out of home ownership quickly or easily - your money is locked up for a longer period of time. Whereas with stock ownership, if something comes up where you need your funds back, you can sell your stocks and have your hands on your money within 3 days tops. This can be a huge advantage should you have a medical emergency or similar unforeseen emergency.
While both markets are good choices for safe long-term wealth creation, historical data shows us that the US stock market has outperformed the real estate market when it comes to average annual returns over extended periods. From 1970 to 2020, the S&P 500 averaged an annual return of around 10%, while the US housing market saw an average annual appreciation rate of approximately 5.5%. While this data is sound and worth considering, always remember, past performance does not guarantee future returns.
Until now, unless you had a trust fund or were rich Uncle Jimmy’s favorite, mortgages made real estate the only attainable option if you wanted to invest big at the start of your wealth building journey. Raise Financial is changing that. Our newest product, Raise Investment will allow you to invest in your future financial stability, using the budget you have available today. Not unlike a mortgage, we invest a large sum of our money in a proven, total stock market ETF, and for a budget friendly membership fee, you get to keep 100% of the returns on the investment. Thanks to this kick start and the magic of compounding returns, over time, you could see almost double the returns compared to investing the same amount each month directly into the stock market.