Stock market malarky
I love the BP community and I'm probably going to get speared for this post, but I'm tired of the drivel spewed on this website by really intelligent people in regards to various investment vehicles, but usually aimed at the stock market (DJIA/S&P). Probably every other podcast the hosts unleash on the market without thorough consideration of what the market is: another wealth building tool. My discussion will focus on 'the market' as a whole - one of the broad base ETFs available at extremely low costs (are there any PM companies managing your properties for 0.5%?). I've got an MBA (finance concentration) but am extremely leery of individual stocks.
@Brandon Turner always talks about building your 'tool chest' of financing options for real estate; consider the stock market another 'tool' to building long term sustainable wealth.
Let's consider the arguments:
- "You can't control the market." If by 'control' you mean 'run every company', yes, you're correct, you can't. If by 'control' you somehow feel you can't sell bad investments, why can't you sell? And BTW, don't sell during a down market when you're feeling 'bad' because you see those paper losses. Selling during a down market is similar to selling your cash-flowing property when it's vacant because the NOI has gone to $0 or negative.
Staying with control, I'll ask this for consideration: Where can you pay $2,500 and retain the collective knowledge of some of the best and brightest business minds in the world?
- "You lower the risk and increase the return." Malarky. Risk and return are correlated and every investment will revert to the mean over long enough periods of time. Unfortunately, none of us have been investing 'in the long term' (over 100 years). We've all been investing in bubbles and dips. Yes, we can try to pick better properties and earn a return, but to get outsized returns, we need to take additional risk. I'm sure Rust Belt investing was great before steel got outsourced to low cost producing nations. How's Rust Belt investing AS A WHOLE right now? Might there be a few gems? Sure. But there are in the stock market as well (NFLX, AMZN, MSFT, etc)*.
- "I own a physical asset." Yes, you do. In both cases you own a physical asset. As an owner of a stock, you own a portion of the company. When Brandon Turner is better off because he "owns 50% of something rather than 100% of nothing", does he own half the boiler? half the roof? Does he own nothing because he can't figure out which half of the investment he owns? Owning one share of a company you may own 1/1,000,000,000 (or less) of a company but you still own part of that company. If you think otherwise, you don't understand the market.
- "Everyone needs a roof over their heads." Yes, most of us do. Has anyone considered the long term demographic trends of the US? Fertility replacement rate is 2.1. The current rate is 1.86 (2014; http://www.cdc.gov/nchs/data/nvsr/nvsr64/nvsr64_06...). What does this mean? Less people need roofs. Considering a simple supply/demand curve, as demand decreases (in the long term), what happens to the price of supply? If there is an excess of supply, prices will decrease, thereby lowering real estate returns (probably reverting to the average which matches inflation - http://www.pragcap.com/robert-shiller-dont-invest-...).
Closing thoughts:
- What investment vehicle can you IGNORE except to pull 4% annually and have a 96% chance of your investment lasting 100 years. Ever ignore a roof? How about when a tenant vacates? How did that $5000 flood affect Brandon's homes? Many people are very successful using the 4% rule (mrmoneymustache.com, etc)
- People will complain that amassing the necessary nest egg to pull 4% annually is difficult/impossible yet there are plenty of discussions here on BP regarding living below your means. Live below your means and invest the difference.
- I do believe that real estate is one of the best and fastest ways to accumulate wealth and is the method I am using in the near term. However, when I consider the long term sustainability of the investment, I would prefer a broader investment base. Picture a stool: You can sit on a one legged stool, but you've got to balance carefully. You can sit on a two legged stool and your balance is a little easier. A three legged stool requires no balance. Real estate is one leg, the stock market is the second leg, and (business interests, bonds, CDs, Treasuries, FX, etc) can form the third leg of the stool.
In conclusion:
As real estate investors we must not categorically eliminate the stock market as a viable investment vehicle (does BP offer a 401k or does @Joshua Dorkin only allow employees to invest in Denver real estate?). I do believe that real estate is the fastest and safest way to amass wealth but there is increased risk with the investment. I believe a truly safe portfolio will include a variety of investments including but not limited to: Real estate, stocks, bonds, etc.
My personal plan is to reach my FI number through real estate then diversify out of real estate into other investments.
*Disclaimer: I do not own nor recommend any of the stocks mentioned in this post nor to I anticipate opening a position w/in the next five days. I am not a financial adviser. This post is only for provoking thought.