{"id":96779,"date":"2020-02-24T09:30:17","date_gmt":"2020-02-24T16:30:17","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=96779"},"modified":"2024-03-26T19:15:33","modified_gmt":"2024-03-27T01:15:33","slug":"real-estate-vs-stocks-performance","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/real-estate-vs-stocks-performance","title":{"rendered":"Real Estate vs. Stocks: What 145 Years Of Returns Tells Us"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC7692497369\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC2449837776\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p>Let\u2019s get one thing straight: everyone should hold both stocks and real estate in their portfolios. Diversification is the ultimate hedge against risk.<\/p>\n\n\n\n<p>But that doesn\u2019t mean we can\u2019t pit stocks and real estate against each other in a classic Mortal Kombat-style matchup. Which earns the best return on investment: real estate or stocks? And while we\u2019re asking this grandiose question, which investment is safer?<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">The Latest Data on Real Estate vs. Stocks<\/h2>\n\n\n\n<p>There\u2019s a sweeping study done by several U.S. and German universities and the German central bank that analyzed data from 16 countries over a 145-year period. It\u2019s a fascinating study, and we\u2019ll get to it in a moment. But it comes with a downside: it only includes data through 2015.&nbsp;<\/p>\n\n\n\n<p>So before we dive into the best data, let\u2019s look at more recent \u2014 but less comprehensive \u2014 data.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Stock market performance<\/h3>\n\n\n\n<p>Fortunately, it\u2019s easy to find clear stock market data.&nbsp;<\/p>\n\n\n\n<p>Over the 45 years from January 1978 through December 2022, S&amp;P 500 averaged an impressive 11.53% return. That includes both dividend income and price gains.&nbsp;<\/p>\n\n\n\n<p>But less impressive is the volatility in the stock market. Take a look for yourself:<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"2086\" height=\"882\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.21.03-PM.png\" alt=\"s&amp;p 500 index 1965-2023\" class=\"wp-image-147525\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.21.03-PM.png 2086w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.21.03-PM-300x127.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.21.03-PM-1024x433.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.21.03-PM-768x325.png 768w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.21.03-PM-1536x649.png 1536w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.21.03-PM-2048x866.png 2048w\" sizes=\"auto, (max-width: 2086px) 100vw, 2086px\" \/><figcaption class=\"wp-element-caption\"><em>S&amp;P 500 Index (1965-2023) &#8211; <a href=\"https:\/\/finance.yahoo.com\/quote\/%5EGSPC\/chart?p=%5EGSPC#eyJpbnRlcnZhbCI6Im1vbnRoIiwicGVyaW9kaWNpdHkiOjEsImNhbmRsZVdpZHRoIjoxLjYxOTI1Mjg3MzU2MzIxODMsImZsaXBwZWQiOmZhbHNlLCJ2b2x1bWVVbmRlcmxheSI6dHJ1ZSwiYWRqIjp0cnVlLCJjcm9zc2hhaXIiOnRydWUsImNoYXJ0VHlwZSI6ImxpbmUiLCJleHRlbmRlZCI6ZmFsc2UsIm1hcmtldFNlc3Npb25zIjp7fSwiYWdncmVnYXRpb25UeXBlIjoib2hsYyIsImNoYXJ0U2NhbGUiOiJsaW5lYXIiLCJzdHVkaWVzIjp7IuKAjHZvbCB1bmRy4oCMIjp7InR5cGUiOiJ2b2wgdW5kciIsImlucHV0cyI6eyJpZCI6IuKAjHZvbCB1bmRy4oCMIiwiZGlzcGxheSI6IuKAjHZvbCB1bmRy4oCMIn0sIm91dHB1dHMiOnsiVXAgVm9sdW1lIjoiIzAwYjA2MSIsIkRvd24gVm9sdW1lIjoiI2ZmMzMzYSJ9LCJwYW5lbCI6ImNoYXJ0IiwicGFyYW1ldGVycyI6eyJ3aWR0aEZhY3RvciI6MC40NSwiY2hhcnROYW1lIjoiY2hhcnQifX19LCJwYW5lbHMiOnsiY2hhcnQiOnsicGVyY2VudCI6MSwiZGlzcGxheSI6Il5HU1BDIiwiY2hhcnROYW1lIjoiY2hhcnQiLCJpbmRleCI6MCwieUF4aXMiOnsibmFtZSI6ImNoYXJ0IiwicG9zaXRpb24iOm51bGx9LCJ5YXhpc0xIUyI6W10sInlheGlzUkhTIjpbImNoYXJ0Iiwi4oCMdm9sIHVuZHLigIwiXX19LCJzZXRTcGFuIjpudWxsLCJsaW5lV2lkdGgiOjIsInN0cmlwZWRCYWNrZ3JvdW5kIjp0cnVlLCJldmVudHMiOnRydWUsImNvbG9yIjoiIzAwODFmMiIsInN0cmlwZWRCYWNrZ3JvdWQiOnRydWUsImV2ZW50TWFwIjp7ImNvcnBvcmF0ZSI6eyJkaXZzIjp0cnVlLCJzcGxpdHMiOnRydWV9LCJzaWdEZXYiOnt9fSwiY3VzdG9tUmFuZ2UiOm51bGwsInJhbmdlIjpudWxsLCJzeW1ib2xzIjpbeyJzeW1ib2wiOiJeR1NQQyIsInN5bWJvbE9iamVjdCI6eyJzeW1ib2wiOiJeR1NQQyIsInF1b3RlVHlwZSI6IklOREVYIiwiZXhjaGFuZ2VUaW1lWm9uZSI6IkFtZXJpY2EvTmV3X1lvcmsifSwicGVyaW9kaWNpdHkiOjEsImludGVydmFsIjoibW9udGgiLCJzZXRTcGFuIjpudWxsfV19\" target=\"_blank\" rel=\"noreferrer noopener\">Yahoo Finance<\/a><\/em><\/figcaption><\/figure>\n\n\n\n<p>More on volatility later, but it marks one of the primary risk factors in any investment.&nbsp;<\/p>\n\n\n\n<p>For reference, Treasury bills returned an average of 4.3% during that time period.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Commercial real estate performance<\/h3>\n\n\n\n<p>The National Council of Real Estate Investment Fiduciaries (NCREIF) compiles the best data on real estate investments in the U.S., going back to 1977. Their data includes over 35,000 privately-owned commercial properties (from office buildings to apartment complexes to industrial and beyond), plus over 150 open- and closed-end funds owning real estate.&nbsp;<\/p>\n\n\n\n<p>Over that same 45-year period from January 1978 through December 2022, the&nbsp;<a target=\"_blank\" href=\"https:\/\/www.ncreif.org\/globalassets\/public-site\/news-page\/news-articles\/snapshots\/2022q4\/oe_snapshot-20224.pdf\" rel=\"noreferrer noopener\">NCREIF Property Index<\/a>&nbsp;(NPI) has averaged an annual return of 9.03%. For additional context, the&nbsp;<a target=\"_blank\" href=\"https:\/\/www.reit.com\/data-research\/reit-indexes\/annual-index-values-returns\" rel=\"noreferrer noopener\">NAREIT all equity index<\/a>&nbsp;of publicly-traded U.S. REITs averaged 11.58% in that time.&nbsp;<\/p>\n\n\n\n<p>As with the S&amp;P 500 return documented above, those index returns include both income and appreciation.<\/p>\n\n\n\n<p>So how does residential real estate measure up?<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Residential real estate performance<\/h3>\n\n\n\n<p>The data is less clear for residential real estate. A report from&nbsp;<a target=\"_blank\" href=\"https:\/\/www.realestatewitch.com\/house-price-to-income-ratio-2021\/\" rel=\"noreferrer noopener\">Real Estate Witch<\/a>&nbsp;found that home prices have increased 7.6 times faster than income since 1965, showcasing just how well residential properties have performed in recent decades.&nbsp;<\/p>\n\n\n\n<p>But residential real estate returns include rental income, not just price growth. Unfortunately, there are precious few reliable resources that include both income and appreciation.&nbsp;<\/p>\n\n\n\n<p>Fractional rental investing platform&nbsp;<a target=\"_blank\" href=\"https:\/\/arrived.com\/blog\/historic-returns-from-investing-in-rental-homes\/\" rel=\"noreferrer noopener\">Arrived<\/a>&nbsp;did a 20-year study in late 2021 that found that residential U.S. real estate returned an average of 11.7% \u2014 sort of. They included financing when running those numbers, which distorted the total return to look higher. Removing leverage, that number drops to 9.5%.<\/p>\n\n\n\n<p><a target=\"_blank\" href=\"https:\/\/www.bankrate.com\/real-estate\/roi-on-real-estate\/\" rel=\"noreferrer noopener\">Sources citing Standard &amp; Poor\u2019s<\/a>&nbsp;claim that residential real estate averages a return of 10.6% over time, but I couldn\u2019t find the original data to verify that or even determine what time frame that figure refers to.&nbsp;<\/p>\n\n\n\n<p>You can see why the 145-year study is so valuable, given how unreliable other data on residential real estate returns is.<\/p>\n\n\n\n<p>As a final thought, compare the stability in home prices to the volatility of stock prices:<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1168\" height=\"450\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/fredgraph-52.png\" alt=\"\" class=\"wp-image-147526\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/fredgraph-52.png 1168w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/fredgraph-52-300x116.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/fredgraph-52-1024x395.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/fredgraph-52-768x296.png 768w\" sizes=\"auto, (max-width: 1168px) 100vw, 1168px\" \/><figcaption class=\"wp-element-caption\"><em>Median Sales Price of Home Sold (1963-2022) &#8211; <a href=\"https:\/\/fred.stlouisfed.org\/series\/MSPUS#\" target=\"_blank\" rel=\"noreferrer noopener\">St. Louis Federal Reserve<\/a><\/em><\/figcaption><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">The 145-Year Study<\/h2>\n\n\n\n<p>A team of economists from the University of California, Davis, the University of Bonn, and the German central bank set out to answer these questions by analyzing a stunning amount of data collected over a 145-year period of time.<\/p>\n\n\n\n<p>The lead authors of the study \u2014 Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor \u2014 reported the findings of their massive study in a paper entitled \u201c<a target=\"_blank\" href=\"https:\/\/www.frbsf.org\/economic-research\/files\/wp2017-25.pdf\" rel=\"noreferrer noopener\">The Rate of Return on Everything, 1870-2015<\/a>.\u201d In it, researchers looked at 16 advanced economies over the past 145 years to find what offers the best return on investment. They compared returns on several asset classes, including equities, residential real estate, short-term treasury bills, and longer-term treasury bonds.<\/p>\n\n\n\n<p>To better compare apples to apples, with each asset type, they adjusted for inflation and included all returns, not just appreciation. Dividend income was included for equities, and rental income was included for residential real estate.<\/p>\n\n\n\n<p>Their findings, in short: Residential real estate was the better investment, averaging over seven percent per annum. Equities weren\u2019t far behind, at just under seven percent.<\/p>\n\n\n\n<p>Then came bonds and bills with a far lower rate of return, surprising no one.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1263\" height=\"438\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.25.12-PM.png\" alt=\"returns on investments in 16 now-wealthy economies\" class=\"wp-image-147527\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.25.12-PM.png 1263w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.25.12-PM-300x104.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.25.12-PM-1024x355.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.25.12-PM-768x266.png 768w\" sizes=\"auto, (max-width: 1263px) 100vw, 1263px\" \/><figcaption class=\"wp-element-caption\"><em>Return on Investments in Wealthy Economies (1870-2015) &#8211; <a href=\"https:\/\/www.atlasresearch.us\/\" target=\"_blank\" rel=\"noreferrer noopener\">Atlas Research<\/a><\/em><\/figcaption><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Real Estate vs. Stocks: Average ROI<\/h2>\n\n\n\n<p>Rental income proved an important factor \u2014 roughly half of the returns on real estate investments came from rental income, while the other half came from appreciation.<\/p>\n\n\n\n<p>Stock investments and investment property each performed differently in various countries, of course. Here\u2019s a comparison of each of the 16 countries:<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1118\" height=\"1035\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.26.54-PM.png\" alt=\"housing versus equity returns\" class=\"wp-image-147528\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.26.54-PM.png 1118w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.26.54-PM-300x278.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.26.54-PM-1024x948.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.26.54-PM-768x711.png 768w\" sizes=\"auto, (max-width: 1118px) 100vw, 1118px\" \/><figcaption class=\"wp-element-caption\"><em>Housing vs. Equity Returns Among Wealthy Nations (1870-2015) &#8211; Atlas Research<\/em><\/figcaption><\/figure>\n\n\n\n<p>Keep in mind that these are long-term return averages over the course of many decades. In real time, these returns bounced up, down, sideways, and in circles.<\/p>\n\n\n\n<p>Here\u2019s a curious little chestnut for you: From 1980 to 2015, the stock market, on average, performed significantly better than real estate investments. Across the 16 countries studied, stock investments earned an average annual rate of return of 10.7 percent, decisively beating the real estate market\u2019s stolid 6.4 percent.<\/p>\n\n\n\n<p>Should we all sell our rental property and move our money into a Vanguard account?<\/p>\n\n\n\n<p>Of course not. But the reasons are multiple and a bit nuanced.<\/p>\n\n\n\n<p>First, a few outlier countries threw off the average return on investment from the time period between 1980 and 2015. Japan saw its real estate markets collapse as its population aged. And in Germany, residential real estate has been stuck in the slow lane for decades.<\/p>\n\n\n\n<p>Meanwhile, stock investments in Scandinavia have exploded.<\/p>\n\n\n\n<p>But the most interesting case for real estate investing lies in its risk-reward ratio.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Risk by Asset Class<\/h2>\n\n\n\n<p>Let\u2019s do a quick stereotype check-in, shall we?<\/p>\n\n\n\n<p>Treasury bonds are&nbsp;<a target=\"_blank\" href=\"https:\/\/www.betashares.com.au\/education\/government-bonds\/\" rel=\"noreferrer noopener\">low-risk<\/a>, low-return. I don\u2019t think anyone\u2019s prepared to challenge that stereotype, which exists for a reason.<\/p>\n\n\n\n<p>Stock investments are high-risk, high-return. This one gets a little more interesting, but a quick look at how stock markets have gyrated for the last century \u2014 up 29 percent one year and down 18 percent the next \u2014 should disabuse anyone of the notion that stock investing doesn\u2019t come with high volatility and risk.<\/p>\n\n\n\n<p>And that brings us to an economic assumption that dates back to, well, the beginning of economic theory. Economists have long held as a given that risk and returns are highly correlated and that \u201cthe invisible hand\u201d of the market will ensure that remains the case.<\/p>\n\n\n\n<p>Why? Because if an asset were low-risk, high-return, everyone and their mother would fling so much money at it that the rate of return would dry up faster than Lindsay Lohan\u2019s acting career.<\/p>\n\n\n\n<p>Except, that assumption hasn\u2019t held true for residential rental properties.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Rental properties: low-risk, high-return<\/h3>\n\n\n\n<p>Throughout modern history, residential real estate investors may actually boast the best return on investment, thanks to its extremely high rate of return with low risk. Take a look at volatility for real estate versus stock for the past 145 years:<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1047\" height=\"741\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.28.36-PM.png\" alt=\"stock vs housing return 1870-2015\" class=\"wp-image-147529\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.28.36-PM.png 1047w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.28.36-PM-300x212.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.28.36-PM-1024x725.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.28.36-PM-768x544.png 768w\" sizes=\"auto, (max-width: 1047px) 100vw, 1047px\" \/><figcaption class=\"wp-element-caption\"><em>Real Equity Returns vs Real Housing Returns (1870-2015) &#8211; Atlas Research<\/em><\/figcaption><\/figure>\n\n\n\n<p>To begin with, real estate is also notoriously illiquid. You can\u2019t buy it and sell it on a whim \u2014 either process typically takes months.<\/p>\n\n\n\n<p>Second, real estate investing is expensive. Until the past 15 years (with the advent of <a href=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-crowdfunding\" data-type=\"link\" data-id=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-crowdfunding\" target=\"_blank\">crowdfunding<\/a>, <a href=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-syndication-vs-reit\" data-type=\"link\" data-id=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-syndication-vs-reit\" target=\"_blank\">REITs &amp; syndications<\/a>) you couldn\u2019t invest your extra $100 a month to buy an investment property.<\/p>\n\n\n\n<p>Even if you leverage to the hilt and borrow the maximum mortgage allowed at a low-interest rate, that still usually puts you at a 20% down payment, plus thousands of dollars in closing costs, which says nothing of credit requirements, income requirements, and\/or lenders\u2019 requirements for investing experience.<\/p>\n\n\n\n<p>In other words, real estate investing has a high barrier to entry.<\/p>\n\n\n\n<p>It\u2019s also difficult to diversify your investment portfolio for those very same reasons. If each asset requires $20-100K in cash to purchase, then it takes a lot of money to build a broad, diverse real estate portfolio.<\/p>\n\n\n\n<p>Rental properties also come with risks from tenants. Tenants could damage your property or default on rent. But you can manage these risks through\u00a0aggressive tenant screening\u00a0and insurance policies (including rent default insurance).\u00a0<\/p>\n\n\n\n<p>You can also manage risk by choosing your locations and investing niche with care. For example, imagine you invest in&nbsp;<a target=\"_blank\" href=\"https:\/\/www.biggerpockets.com\/blog\/student-housing\" rel=\"noreferrer noopener\">student housing<\/a>&nbsp;in college towns. You could choose college towns with both affordable real estate and massive demand for off-campus housing. A&nbsp;<a target=\"_blank\" href=\"https:\/\/porch.com\/advice\/best-college-towns-for-student-renters\" rel=\"noreferrer noopener\">study by Porch.com<\/a>&nbsp;found that Rhode Island, Maine, and Illinois boast the most savings for college students living off-campus, creating a huge demand for off-campus student housing. In these states, off-campus housing prices are 37%, 26%, and 25% lower than on-campus housing, respectively. (Check out Providence, Rhode Island, for a particularly good example.)<\/p>\n\n\n\n<p>Finally, rental properties offer fantastic tax breaks. If you live in the property and house hack, you can write off mortgage interest and exclude up to $500,000 of net gains through the Section 121 exclusion. You can also deduct depreciation on your investment portfolio, use 1031 exchanges to defer taxes on the sale of any rental-only properties, and a dozen other tax perks besides.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Measuring Risk vs. Return&nbsp;<\/h2>\n\n\n\n<p>How do you measure an investment\u2019s risk against its rate of return?<\/p>\n\n\n\n<p>It turns out there\u2019s a simple way to determine the best return on investment: a literal risk-reward ratio. It\u2019s called the Sharpe ratio after its creator, William Sharpe.<\/p>\n\n\n\n<p>You start with an asset\u2019s return and subtract out the return of a short-term, risk-free alternative (like U.S. Treasury bills). That gives you a \u201crisk premium\u201d \u2014 the extra return the asset delivers over a risk-free investment.<\/p>\n\n\n\n<p>Then you simply divide that \u201crisk premium\u201d over the asset\u2019s volatility, as measured by its annual standard deviation in value:<\/p>\n\n\n\n<p><em>Risk premium \/ average annual standard deviation<\/em><\/p>\n\n\n\n<p>If the math gives you a headache, don\u2019t worry about it. Just think of it as return divided by risk. A higher ratio indicates a better investment \u2014 greater return on investment relative to the risk. Here\u2019s the breakdown:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Treasury bonds:&nbsp;<\/strong>Their Sharpe ratio of around 0.2 is weak sauce.<\/li>\n\n\n\n<li><strong>Stock investments:<\/strong>&nbsp;Not much better, at 0.27. Sure, their returns were strong, but they\u2019re more volatile than plutonium in a mad scientist\u2019s lab.<\/li>\n\n\n\n<li><strong>Residential real estate<\/strong>: The average Sharpe ratio of 0.7 is great.<\/li>\n<\/ul>\n\n\n\n<p>The Sharpe ratio for real estate has only grown stronger over time. Since 1950, the Sharp ratio for real estate has averaged an impressive 0.8.<\/p>\n\n\n\n<p>Another way of looking at it is return per unit of risk \u2014 here\u2019s how stock investments have compared to real estate in each of the 16 countries studied:<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"786\" height=\"754\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.33.29-PM.png\" alt=\"risk per unit of risk by nation\" class=\"wp-image-147531\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.33.29-PM.png 786w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.33.29-PM-300x288.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.33.29-PM-768x737.png 768w\" sizes=\"auto, (max-width: 786px) 100vw, 786px\" \/><figcaption class=\"wp-element-caption\"><em>Return Per Unit of Risk by Nation<\/em><\/figcaption><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Rate of Return and GDP<\/h2>\n\n\n\n<p>Advanced economies tend to have slow economic growth over any given period of time, right? So how have returns done so much better than the GDP growth in these countries? Aside from the obvious issue that these economies looked very different in 1870 than they do today, there\u2019s an interesting answer to this query.<\/p>\n\n\n\n<p>It turns out the best return on investment for a country isn\u2019t tied in a 1:1 relationship with its GDP. Over time, returns on these asset classes tend to grow on average around double the speed of the country\u2019s economy as a whole, measured by GDP.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"573\" height=\"478\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.34.46-PM.png\" alt=\"Annual Rate of Return of All Asset Types Compared to GDP Growth (1870-2015) - Atlas Research\" class=\"wp-image-147532\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.34.46-PM.png 573w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Screenshot-2023-03-10-at-2.34.46-PM-300x250.png 300w\" sizes=\"auto, (max-width: 573px) 100vw, 573px\" \/><figcaption class=\"wp-element-caption\"><em>Annual Rate of Return of All Asset Types Compared to GDP Growth (1870-2015) &#8211; Atlas Research<\/em><\/figcaption><\/figure>\n\n\n\n<p>If anything, that \u201creturns average double GDP growth\u201d summary is skewed low because it includes the weak return on investment of bonds and bills. On average, the stock market and real estate market perform several times better than GDP growth.<\/p>\n\n\n\n<p>This helps explain why income inequality tends to expand over time in advanced economies. Average Joe does not own stock investments, and if he owns any real estate, it\u2019s his primary residence \u2014 a single-family home that he probably only earns appreciation on with no rental income (and remember, rental income makes up half of real estate investment returns!).<\/p>\n\n\n\n<p>So, how does Average Joe improve his finances? Only through a raise. His raise is tied to how his employer is doing, which, in turn, is tied to how the economy is doing.<\/p>\n\n\n\n<p>In other words, Average Joe\u2019s finances are tied to GDP growth.<\/p>\n\n\n\n<p>But Wealth-wise, Wendy, who\u2019s not nearly as average as Joe, invests as much money as she can in the stock market and rental real estate. She builds a portfolio of passive income that earns money even while she sleeps. That income is based on the rate of return of her investments, not based on the economy.<\/p>\n\n\n\n<p>Coupled with the impressive tax benefits enjoyed by those with an investment property? Wendy\u2019s financial advisor undoubtedly sings her praises.<\/p>\n\n\n\n<p>Conservatives and liberals can argue all they want about how much to redistribute wealth. But as an individual, you want to be like Wendy, not Joe. You want your wealth and income tied to the returns of the stock market and real estate investments, not tied to GDP.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Why Real Estate Investments Crush Bonds<\/h2>\n\n\n\n<p>Bonds are boring.<\/p>\n\n\n\n<p>No, really. We already talked about how they\u2019re low-risk, low-return. Why bother with this asset class if you can invest in rental properties, which are low-risk and high-return?<\/p>\n\n\n\n<p>A common opinion I hear people say is, \u201cBonds may not have performed well over the past 15 years, but that\u2019s abnormal! Just look at how well they did in the \u201980s!\u201d<\/p>\n\n\n\n<p>Interestingly, this new study disproves that notion. The high bond yields of the 1980s were actually the anomaly, not the norm. In fact, if you look at bond returns over the past 145 years, there were many periods where they earned negative returns.<\/p>\n\n\n\n<p>Want a few reasons why rental real estate offers the best return on investment compared to bonds?<\/p>\n\n\n\n<p>Here\u2019s a simple one: bonds expire. They pay out for a specific term, then they stop paying. Rental properties keep paying forever.<\/p>\n\n\n\n<p>And not only do they keep paying indefinitely, but they also pay more over time. With every year that goes by, fixed bond payments become less valuable in real purchasing power due to inflation. But rental income and property value rise right alongside inflation.<\/p>\n\n\n\n<p>It\u2019s actually your fixed mortgage payment that goes down over time in inflation-adjusted dollars! Then one day that mortgage payment disappears, and your rental cash flow explodes.<\/p>\n\n\n\n<p>Sure, government bonds offer stability compared to index funds, individual stocks, and even rental properties. Bonds pay the same amount every month. They never call you about a leaky roof or stop sending payments because they spent too much on cigarettes and Bud Light that month.<\/p>\n\n\n\n<p>But at what cost in returns?<\/p>\n\n\n\n<p>If retirement looms on the horizon for you, familiarize yourself with&nbsp;<a target=\"_blank\" href=\"https:\/\/www.biggerpockets.com\/blog\/sequence-risk-retirement\" rel=\"noreferrer noopener\">sequence risk<\/a>&nbsp;and&nbsp;<a target=\"_blank\" href=\"https:\/\/www.biggerpockets.com\/blog\/4-percent-retirement-rule\" rel=\"noreferrer noopener\">how owning rental property affects the 4 percent rule<\/a>, so you don\u2019t necessarily have to resort to bonds.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Should I Ditch Stocks and Just Buy Rentals?<\/h2>\n\n\n\n<p>Stocks may be a roller coaster, but in the long run, the good times outweigh the bad. And ultimately, finding the best return on investment requires a diversified portfolio. Stocks balance rental properties well. And&nbsp;<a target=\"_blank\" href=\"https:\/\/www.biggerpockets.com\/blog\/stock-market-crash\" rel=\"noreferrer noopener\">when equities go down, residential real estate almost always goes up<\/a>.<\/p>\n\n\n\n<p>Real estate is illiquid compared to equities. You can buy and sell mutual funds, ETFs, or individual stocks at a moment\u2019s notice. Investment property isn\u2019t quite so easy to get in and out of.<\/p>\n\n\n\n<p>Stock investing also offers truly passive income. Ultimately, rental income can never be as passive as dividend income (even with property management handling general upkeep).<\/p>\n\n\n\n<p>It\u2019s much easier to diversify your investment portfolio with stocks, as well. You can spread $500 across thousands of companies, in every region of the world, in every industry, and at every market cap. You\u2019d be lucky to get away with only putting down $5,000 on a single rental property!<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Is there a place for stocks in your portfolio?<\/h3>\n\n\n\n<p>Residential real estate offers excellent returns with low volatility and huge tax advantages. I love rental properties. But that doesn\u2019t mean there\u2019s no place for equities in your portfolio.<\/p>\n\n\n\n<p>Stocks provide liquidity, long-term growth, easy diversification across sectors and countries, and easy investing via tax-sheltered accounts such as IRAs and 401(k)s. Real estate provides stability, a hedge against inflation, ongoing high-income yields, built-in tax advantages, and diversification from the stock market.&nbsp;<\/p>\n\n\n\n<p>If you invest well (and decide wisely <a href=\"https:\/\/www.biggerpockets.com\/blog\/how-much-to-charge-for-rent\" data-type=\"link\" data-id=\"https:\/\/www.biggerpockets.com\/blog\/how-much-to-charge-for-rent\" target=\"_blank\">how much to charge for rent<\/a>), rental real estate starts performing for you immediately. Equities take longer; the stocks you buy today won\u2019t produce significant income for you until 10, 20, or 30 years from now. But the long-term returns will compound for you at prodigious rates, and a diverse portfolio protects you from a crash in a single asset class or market segment.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1200\" height=\"1200\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Historical-Stock-Market-Returns-1.jpg\" alt=\"the pyramid of equity returns\" class=\"wp-image-147533\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Historical-Stock-Market-Returns-1.jpg 1200w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Historical-Stock-Market-Returns-1-300x300.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Historical-Stock-Market-Returns-1-1024x1024.jpg 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Historical-Stock-Market-Returns-1-150x150.jpg 150w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Historical-Stock-Market-Returns-1-768x768.jpg 768w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/03\/Historical-Stock-Market-Returns-1-200x200.jpg 200w\" sizes=\"auto, (max-width: 1200px) 100vw, 1200px\" \/><figcaption class=\"wp-element-caption\"><em>The Pyramid of Equity Returns &#8211; <a href=\"https:\/\/advisor.visualcapitalist.com\/historical-stock-market-returns\/\" target=\"_blank\" rel=\"noreferrer noopener\">Visual Capitalist<\/a><\/em><\/figcaption><\/figure>\n\n\n\n<p>Build up your retirement account with passive income from rentals and dividends, and when your peers are still working in a decade or two, their incomes tied to GDP growth, you can offer sympathetic words.<\/p>\n\n\n\n<p>And then you can go back to playing golf and relaxing with your children, having reached financial independence.<\/p>\n\n\n\n<div id=\"hero-block_62df1a82bfc88\" class=\"first:mt-0 hero-block py-4    has-background has-slate-200-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-2\/3 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-slate-800-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">A realistic guide to lasting wealth by David Greene<a rel=\"noreferrer noopener\" href=\"https:\/\/www.amazon.com\/Pillars-Wealth-Invest-Financial-Freedom\/dp\/1960178024\/ref=sr_1_1?crid=145PQ1WBAKLOV&amp;keywords=pillars+of+wealth+david+greene&amp;qid=1692306530&amp;sprefix=pillars+of+wealth+david+greene%2Caps%2C121&amp;sr=8-1\" target=\"_blank\"><\/a><\/p>\n\n\n\n<p class=\"has-theme-slate-dark-color has-text-color\">In this book, David Greene provides a holistic approach to systematically make more money and watch it grow over time. You\u2019ll learn how to unlock your earning potential, adopt new budgeting systems, start your own business, and invest for constant growth so you can&nbsp;<strong>become wealthy the realistic way. <\/strong><\/p>\n\n\n\n<div id=button-custom-event-block_64134fe56b103 class='button-custom-event'>\n      <a href=\"http:\/\/biggerpockets.com\/pillars\" x-on:click=\"window.analytics.track(&#039;Blog Block | Publishing: Pillars Book&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/real-estate-vs-stocks-performance&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Get Your Copy<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/3 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/10\/POW_cover_mockup_01-e1696600398400.png\" alt=\"\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Wondering whether your money&#8217;s better off in real estate or stocks? Learn from past performance! Here&#8217;s a summary of 145 years of economic data from 16 countries. Read on to finally answer the question: Should I invest in real estate, stocks, or both?<\/p>\n","protected":false},"author":158586,"featured_media":147534,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7399,7119],"tags":[7210,7209],"class_list":["post-96779","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-diversifying-investments","category-biggerpockets-daily","tag-choosing-real-estate","tag-newbies-advice"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/96779","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=96779"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/96779\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/147534"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=96779"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=96779"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=96779"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}