Bonds vs. Stocks vs. Real Estate: Which One Wins?

Bonds vs. Stocks vs. Real Estate: Which One Wins?

2 min read
Max Sharkansky Read More

Join for free and get unlimited access, free digital downloads, and tools to analyze real estate.

There once was a time when private real estate wasn’t even on the same playing field as stocks and bonds as an investment category.

But as investors sought higher yields and less volatility, along with greater control over their investments, they began to place more capital in private real estate—and the category has thrived.

Still, it is worth examining whether private real estate has lived up to the hype and performed better than stocks and bonds from a historical perspective. Over time, did real estate generate better returns for investors with lower risk?

In previous articles, we defined private real estate and how it differs from other types of investing and explored which expectations were and were not realistic for private real estate investments.

Now, let’s take a look at bonds, stocks, and private real estate and compare how they’ve performed over time.

Young Asian businesswoman frowning with concern as she tries to understand something she is reading on her laptop computer scratching her head with her pencil in perplexity

Bonds Returns

Bonds are typically low-risk, low-return instruments. They also expire after a certain time, ceasing to pay out investor returns.

While bonds offered high yields during the 1980s, that time period was an anomaly, according to The Rate of Return of Everything, 1870-2015, an in-depth study by several researchers released as part of the Federal Reserve Bank of San Francisco Working Paper Series. (1)

Related: Real Estate vs. Bonds: “Inflation Shelter” vs. “Naked and Afraid”

The study, which examined rates of return on various investments in 16 now-wealthy economies and adjusted for inflation, showed that during this 145-year period, bond yields averaged 2.5 percent annually and were actually often negative.

Bonds do offer stability, paying about the same amount to investors each month, but the cost in lost returns over time is high.

Stock Returns

Stocks (also known as equities) are liquid investments that can provide quick cash flow when needed. Income from stocks is passive, and individual investors have no control over the amount of this income.

Stocks do allow diversification over a variety of companies and industries, and there is no minimum amount to investing in them, but it can take decades for them to produce significant income for investors.

Related: Should Real Estate Investors Sleep Soundly Despite Stock Market Scaries?

In the study mentioned above, the researchers found that equities yielded a 6.9 percent average annual return during the time period studied.

close up of hand stacking quarters in various piles

Private Real Estate Returns

Private real estate is an illiquid investment that is noted for its low risk and high returns.

The category provides immediate, steady returns in the form of rental income and long-term returns in the form of capital gains.

In the rate of return study, housing (residential real estate, including multifamily) yielded a 7.05% annual average return, outperforming both stocks and bonds during that time period.

What’s more, real estate is a physical asset that offers many benefits stocks and bonds do not. Profits can be increased by improving real estate through renovations and strong property management, boosting rental income and increasing valuation at disposition. The category also offers numerous tax benefits and can positively impact local economies and communities.

In addition to offering strong returns, private real estate is rightfully viewed by investors as a safe haven for investment, providing wealth preservation for generations to come. For all of these reasons, it makes an excellent addition to many investors’ diversified portfolios.

Sources

  1. https://www.frbsf.org/economic-research/files/wp2017-25.pdf

What’s been your experience with bonds vs. stocks vs. real estate? 

Let’s talk in the comment section below.