The number of express or implicit assumptions in any comparison is huge and that makes it easy to “prove” or “disprove” whatever conclusion the writer wishes to reach or to reach a conclusion of dubious worth even when trying to be as objective as possible.

As an example, one of the problems with analysis is finding the right comparison. It is easy enough to take a well recognised index as a proxy for investment in stocks (factoring in dividends)- you can always invest in an index fund to achieve the benchmark return. However, finding a sensible proxy for property is a lot harder. National or even regional average data for sale prices of real estate are not meaningful because, as individual property investors, we will be investing in specific properties in specific (local) markets.

I concluded that an investor can do very well out of an investment in stocks and can do very well out of an investment in property.

That said, the analysis is still well worth doing as it forces me to think about what makes a good investment. My retirement plan calls for investment in both equities and real estate.

Here’s a quick look at some of the articles that caught my eye over the past week…

FMF asks if going to grad school is a financial mistake.
JLP talks about teaching high school kids about personal finance.
Flexo broke down his 401(k) stat…

Which actually comes back to the matter of inflation. Perhaps both you and I are right — 5%-6% could be accurate now because that’s true inflation after you factor in the money supply expansion from looser credit standards. Previous lower inflation numbers were based on 20% down tighter credit. This means the typical inflation X% factor perhaps should be applied to other asset classes. If you thought stocks were 10% (3.5% inflation 6.5% real return), that 2% inflation for housing is probably there bumping up stocks to 12%. Example, people can borrow much more money leaving much more money to put into either the stock market (more demand pushing prices up), spending the money (more cash for companies improving results) or putting it into savings (more reserves for banks to lend even more money). I suspect we are in a global credit bubble that’s pushing up returns on all asset classes — housing, stocks, bonds, commodities so the only real way comparison is to base it on historic real returns.

Dong, I will say that I don’t know much about options investing. However, I think Money magazine was afraid of leveraging stocks because they swing so wildly. They did mention the ability to use margin accounts, but again, I don’t see it as being an overall successful strategy. One more thing, you can’t live in (or collect rent from) your leveraged stocks.

BTW, most landlords historically considered 10%/year as the target number for rental income. 6% is borderline unsustainable. And some coastal areas of California are seeing as low as 3% as the annual rent:price ratio — I’d like to see somebody attempt to push 3% as a good buy number.

what was it about great minds thinking alike? ;-)

If your stock gave off dividends wouldn’t you re-invest those? similarly you need to consider the rental income for real estate too. after 30 yrs, the house is free and clear so you should consider the rents as a dividend. assuming you bought in California and the rents are 0.06%/mo of the value of the house, you should consider 6% as the annual dividend off the future value of the house.

anyway, like you i think the article isn’t accurate.

Sincerely,

REG