Stocks vs. Real Estate: Retrain Your Thinking

Stocks vs. Real Estate: Retrain Your Thinking

I find it interesting so many of us have strong opinions concerning stock investments vs. real estate investments.  Personally, I blame most of the sentiment on the media.  Beyond that exposure; however, there is a stark difference on the way we value and perceive both investments.

Stocks are valued in real-time on a live streaming (9:30am-4pm), free-exchange market.  Heck, even after hours the trading continues.  Places like Hong Kong open their markets at 8pm EDT.  Every day, you can see and easily equitize your values.

By contrast, real estate has no such exchange.   To get a price, an expert needs to tell you what they think the property is worth.  Or, you can rely on a Zillow algorithm (Wait…a Zillow what?  In a world of algorithms, you had to expect something for measuring real estate values).

I find it ironic that we check the values of our investment portfolios almost daily, yet evaluate our real estate assets infrequently (at best).  I often ask clients, “what’s your house worth?”  Unfortunately, the most common response I get is, “I don’t know, but I paid XYZ dollars for it.”   Then there is a moment of silence between us, as it reveals that NO ONE knows.

In my eyes, this is really fascinating.  I believe we should view our stock portfolio similarly to our real estate portfolios.  So, how do we retrain 40-60 years of viewing these assets in different lights?  For that, see my four-step guide below.

Step 1- Remain unemotional.
 

I know, I know…  I’ve said this numerous times, over several blogs, about different topics.  But, it is the best thing in any financial scenario.  Getting emotional leads to irrational behavior; that leads to bad decisions.  Quite frankly, one of the biggest benefits of working with a financial planner is to have someone emotionally detached help you control your money.

People don’t get emotional if the house down the street sells for less than they thought.  These same people also don’t get worked up about some Zillow report.  Take that same mentality and direct it towards your equities.  (It may be easy to do during this unbelievable bull market; however, we must find a way to remain cool, calm, and collected in times of volatility, too).  Remember, losing money in the stock market only occurs when you sell when values are down.

Step 2- Remember the timeline.  
 

Most people buy a home, live in it for a bunch of years, and then sell that home.  In today’s world, it is rare that we have a 50-60 year relationship with a home.  Yet, most of us go into a home not concerned about the price appreciation or fluctuation.  We come to grips with being there for an extended period and don’t worry about prices.  The idea of selling that same home for an equal (or lesser) value than the purchase price is almost always brushed off as simply bad timing.  The brain works in mysterious ways, but this one has me puzzled.

When it comes to your stock portfolio (which is primarily earmarked for retirement) the time line is legitimately 50-60 years.  We often start our first 401(k) investment at our first job.  We then typically own stocks throughout the remainder of our lives, albeit at a decreasing amount.  That is a 60-plus year time horizon, during which we’re going to own stocks in some capacity.  The clock doesn’t stop when we reach retirement.  In fact, we’ll need these assets to last much longer.

Analogous to stocks, your housing needs won’t stop at retirement, either.  There is always something that needs to be done or replaced.

Remember, our timeline with our equity investments is typically longer than our real estate timeline.

Step 3- Think about the Risk vs. Return.
 

Many of us associate stocks as “risky” and real estate as “safe.”  I’ve always wondered why?  I suppose it’s a mixture of factors (some of which have been mentioned in this article like frequency of exchange and daily valuation).  Some see real estate as a tangible asset, while stocks simply appear in a virtual account (unless you’re one of the few who still has stock certificates).  No matter what; however, stocks are much more liquid than real estate.

Let’s look at this from another angle.  What about the risk from owning equities?  Owning stocks does indeed carry risk.  But, history shows (e.g. 2008-2009) that real estate can be equally volatile in the short-term.  So once again, why do we take a long-term view with real estate and not with our retirement portfolios?

As you can see in the below graph, the probability of having a positive return in U.S. equities (represented by the S&P 500) over the course of 15 years is rather high. If we took this same chart out to a 30-year holding period over the same time frame (1926-2016) the result would be nearly 100%.

The key has been understanding short-term volatility and not letting that impact your behavior and affect your long-term goals.  Bottom line, don’t always associate volatility with risk.

If I showed you the additional chart below, would you say the red line is something you couldn’t stomach?  I’m asking you to take a step back and think.  Take the same macro view you do about real estate and apply it to your stocks.

Step 4- Drown out the media
 

The old adage is: no news is good news (especially for equity investing).  The media needs you to tune in.  Discussing a 2% increase in real estate prices from last year isn’t going to sell advertising dollars; bombastic statements that instill fear and greed will.  It pulls at our emotions because we all want a successful retirement.   There is no better way to do that than hit you where it hurts, your wallet.  This is exactly what our over-saturated news market does.  And you know what?  They’re winning!

We are riding an 8-year bull market where equities have multiplied in value over the past few years.  Having said that, let me give you a glimpse of what the news has reported:

How is this healthy?  These articles give you reasons why you shouldn’t be investing.  It is becoming so incredibly hard to avoid this oversaturated, unfriendly media frenzy.  But, you must –  for yourselves, for your families, and for your retirement!  It would be more productive to read about The Kardashian’s than spend your time getting emotionally charged from these prognostications.

The best plan is to review your goals and portfolio allocations regularly.  Make adjustments, if necessary. Treat stock market news like real estate news – drown it out and don’t drive yourself crazy!

Final thoughts

If you have a relationship with a financial planner you trust, than you have someone who is watching, and caring, about your investments.  Can you say the same for your home?  I truly believe it’s a healthy exercise to handle stock market investing like home purchasing.

Go enjoy your days and spend time thinking about the things you can control. Let the markets do their work.  Otherwise, you’ll simply get in your own way and, from our experience that can be a formula for disaster.

Andrew Rosen
Advisor
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In March 2010, Andrew Rosen joined the Diversified team, bringing with him nine years of financial industry experience. In his role as Advisor, Partner, Andrew forge ... Click for full bio

Most Read IRIS Articles of the Week: Feb 19-23

Most Read IRIS Articles of the Week: Feb 19-23

Here’s a look at the Top 11 Most Viewed Articles of the Week on IRIS.xyz, Feb 19-23, 2018


Click the headline to read the full article.  Enjoy!


1. Don’t Get Pinged by the Social Security Earnings Limit


I’d like to introduce you to Peggy. Born in 1956, Peggy will be 62 in 2018. She has worked in retail her whole life, the past twenty-five years spent in management. Peggy divorced from her husband 14 years ago, is still single and has no children. — Dana Anspach

2. We're Back to “Bad News is Good News” and “Good News is Great News”


This week the markets shrugged off last week’s fears and went back to the slow and steady melt up, despite economic news that looked likely to once again rock the boat. — Lenore Elle Hawkins

3. Q1 2018 Factor Views


Themes established in 2017 across a wide range of markets and factors continued to resonate through the fourth quarter. Economic growth was strong and supportive of equity markets across the globe, a range of volatility measures reached all-time lows, and business and consumer sentiment remained elevated. — Yazann Romahi and Garrett Norman

4. A Beneficial Basket of Commodities


Advisors and investors that feel they are hearing more and more about commodities and the corresponding exchange traded products in recent months are right. That is a natural result of dollar weakness and yes, the greenback is floundering again in 2018. — Tom Lydon

5. 3 Trends Shaping the Future of Asset Management


As the industry works to cope with new regulation, wades through an outpouring of new products, learns to satisfy investors’ shifting priorities and manages the active-passive debate, the viability of business units will be questioned, and at times radical measures will be taken. Peter Hopkins

6. 5 Ways Advisors Leave Money on the Table, and What to Do About It


My hope is that this article points out some opportunities for you to make more money and serve your clients at a higher level and that you decide to do something about it. — Bill Bachrach

7. The Market Has Gone Wild! Is It Time to Change Your Investment Strategy?


Whether the market is flying high or taunting your emotions with new lows and some bumpy volatility, here are four things every investor should keep in mind ... — Lauren Klein

8. How to Deepen Client Relations and Capture New Business Using Engaging Content


Why financial advisors NEED to understand much more clearly the power of good digital market. With tools like AdvisorStream, it’s easier than ever to get the content you need to drive leads and referrals today! — Kirk Lowe and Matt Halloran

9. Three Ways The Most Successful Gain Big Attention


How do some firms and ideas go from nowhere to everywhere in a few short months? All of a sudden a restaurant becomes popular, a gas station gains a cult following, or a Broadway show becomes too popular to get a ticket for years. — Maribeth Kuzmeski

10. Who Are the Hottest FinTech Firms and Influencers Around the World?


"Worldwide, $27.4 billion poured into fintech startups in 2017, Accenture reports, up 18% from 2016. With so much in play, it’s not surprising that 22 companies are new on this, the third edition of our list."  — Chris Skinner

11. The New Stock Market Normal Is Not What You Think!


Many sensational headlines have been written the past few weeks about market declines, but two things have increased for sure: the viewership and the ad revenues of financial media organizations — Preston McSwain​​​​​​​

Douglas Heikkinen
Perspective
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IRIS Co-Founder and Producer of Perspective—a personal look at the industry, and notables who share what they’ve learned, regretted, won, lost and what continues ... Click for full bio