Utilities and Real Estate & Retail

BULLS & BEARS: With real estate the rage, it's time to swing to stocks

July 25, 2005

Stocks or real estate. Which one will "show you the money"?

In my last column, I pointed out that-over two or three decades-an investment in stocks, with an average 10-percent return, should double in value every seven or so years.

The big problem investors have is that the average 10 percent return is created by erratic and sporadic bursts and busts in stock prices. It's nerve-racking.

The bursts and busts really tax people's emotions and drive some people away from investing in stocks altogether. These are the folks that erroneously equate investing in the market to a casino.

To avoid the emotional roller coaster, some people invest only in real estate. The I-hate-stocks-I-only-buy-real-estate crowd explains why with the quip, "After all, they ain't makin' any more of it."

At the end of 1998, the S&P 500 index was a little above 1,200. Today, it's a little above 1,200.

In the same period, the average price of an existing U.S. home went from $155,000 to $240,000.

In the last 6-1/2 years, the stock market hasn't returned squat, but your house value has gone up a whopping 55 percent. And if your house is in a semi-swanky neighborhood, it probably went up a lot more than that.

So far in the 21st century, the real estate groupies have been the winners. So how could anyone fault investors for throwing in the towel on stocks and wanting to buy God's green earth?

My family has owned a house on Lake Michigan in the Indiana Dunes area since 1948. It has probably appreciated faster than the average Hoosier home because it sits on the beach and because of its proximity to Chicago.

In the last 6-1/2 years, it has done much better than average and has almost doubled in value; in the 57 years we've owned it, it has gone up in value 75-fold, from $10,000 to $750,000.

Over the years, there has been upkeep, utilities and property taxes. But still, 75 times the investment is terrific.

What if Grandpa, though, had put the same $10,000 into the stock market instead?

Using the S&P 500 as a gauge, over the same 57 years, $10,000 grew into $715,000.

But instead of paying taxes and upkeep, we also would have earned another $235,000 in dividends for a total return of $950,000.

Wow-95 times the investment!

In the short run, stocks have been the loser, and in the long run they were the winner. But in reality, both were a great place to put $10,000 57 years ago.

And, honestly, you can't put a price on sitting on the beach with friends, having a glass of wine, and watching the sunset across Lake Michigan. It sure beats opening a brokerage firm statement.

Since stocks have done so poorly recently and real estate has done so well, it just seems to me the pendulum should someday soon start swinging the other way.

In 1998, everybody was lathered up about stocks, and we all should have piled in to real estate.

In the July 25 Forbes, Rich Karlgaard put it succinctly. He shared his "best piece of investment wisdom: When America is talking stocks, buy real estate; when America is talking real estate, buy stocks."



David Sheaff Gilreath, CFP® is co-owner of Sheaff Brock Investment Advisors, LLC, a money management firm specializing in separate account management throughout the Midwest. Views expressed are his own. He can be reached at 317.705.5700 or daveg@sheaffbrock.com.
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