Stocks, mutual funds vs. Real estate

[redmond007]

I am just starting to get interested in learning more about personal finance and investing. There is a great deal of literature out there, I wanted to see if people had any opinions on which would be a better type of investment strategy to pursue - investing in real estate (flipping properties, and commercial properties), or investing in stocks, bonds and mutual funds. I know it's good to have a diversified financial portfolio. Which in general is more secure, and which would allow you to realize quicker returns? Thanks.

[RandomGuy101]

Basically the higher returns you seek the higer risk you will be taking on. What are your long term financial goals? IMO flipping properties has extraordinary risk because of the huge amount of debt you are taking on.

I believe that a well diversified portfolio of stocks and bonds is the best choice for most investors. If you would like to add real estate to your portfolio I would reccomend investing up to 20% of your equity holdings in REITs (real estate investment trusts) instead of purchasing individual properties.

If you are looking for a great book on investing in general I would reccomend "Bogleheads' Guide to Investing." Also a great place to post this question would be on this forum:
Morningstar: Stocks, Mutual Funds, Investing and Personal Finance

[redmond007]

Originally Posted by RandomGuy101

Basically the higher returns you seek the higer risk you will be taking on. What are your long term financial goals? IMO flipping properties has extraordinary risk because of the huge amount of debt you are taking on.

I believe that a well diversified portfolio of stocks and bonds is the best choice for most investors. If you would like to add real estate to your portfolio I would reccomend investing up to 20% of your equity holdings in REITs (real estate investment trusts) instead of purchasing individual properties.

If you are looking for a great book on investing in general I would reccomend "Bogleheads' Guide to Investing." Also a great place to post this question would be on this forum:
Morningstar: Stocks, Mutual Funds, Investing and Personal Finance

Thanks. My long term financial goal is to have a net worth of at least 1 million dollars within 10 years. My net worth right now is under 100k, but I make a good salary, I just have to be frugal, start saving more agressively, and learn to manage my money. My goal is really ambitious, but I do not have a problem with taking risks, that's why I'm interested in learning what will bring me the most returns in the shortest amount of time.

[RT Wolf]

Stocks using value investing.

But then, that's my response to everything.

[RandomGuy101]

Congrats on having an excellent goal to strive for! I actually have the exact same goal but I am starting with over 350K.

Assuming a well diversified portfolio returns a compounded annual rate of 10% over the next 10 years (a lot of people think future rates of return might be more like 8%) for your 100K to grow to 1 M you would need to save about 60K annually (I think I did this math right lol).

Assuming you have a 401K you can max that out with about 15K pre tax dollars. You would then need to save 45K of your after tax dollars.

I read somewhere that the average person can live off approxiamtely 30K a year. This means to save 60 K net you would need to earn:
(30K + 45K) * (1.33) (33% = 28% federal + 5% state taxes) = 100 K
100K + 15K for 401K = 115K.

If you can earn 115K per year over the next 10 years your goal is definitely doable using a diversified portfolio of stocks/bonds/REITs (obviously if you are married or have children you would have to earn much more). If your earning power is not this high then you will have to take more financial risk in order to get the higher annual compounded rate of return.

[searstower]

1st rule of investing
Never, ever invest in something because someone else thinks it's a good idea. Always do your due dilegence.

I just wanted to get that out of the way. Even if you only followed the advice of Warren Buffet, one of the most talented investors in the world, you never know the whole story.

I wanted to see if people had any opinions on which would be a better type of investment strategy to pursue - investing in real estate (flipping properties, and commercial properties), or investing in stocks, bonds and mutual funds.

Your best investment strategy will depend on your own situation. It sounds like you are looking to invest your money for a while and let it grow and you don't need any cash back for a while.

In that case, flipping real estate is probably not the best fit for you now. It takes tremendous amount of time to do and lots of teamwork. You don't make any equity, just cash, so unless you are planning on quitting your other job, you probably won't be able to make it work unless you find some good flippers and become their funding partner, and then your ROI will depend mostly on the real estate market which you are working in.

Bonds are typically a low ROI and since you are willing to take more risk for more return, they are probably not for you right now either.

Mutual funds suck. I know lots of people out there will argue with me, but keep in mind that they usually have a 3-4% management fee associated with them with cuts into your ROI. Go with index funds instead. Oh, and every fund manager will try to convince you that theirs beats the market consistently, but do your research. In the last 10 years, a hyper monkey picking index funds would have had a better performance record than almost all of the mutual funds on the market.

I know it's good to have a diversified financial portfolio.
Having a diversified portfolio will help you NOT LOSE money. It is not the best strategy though for making money. Think about it. A diversified portfolio means that if one of your stocks goes down, then another one is going up at about the same rate and will prevent much loss in your account. But, when one of your stocks is going up, another is going down!

You end up about even anyway, just growing as the market grows at about the same rate as the market. If you were 55 and had all the money you needed to retire, then sure, it's a great strategy.

However, if you want to do better than the market by investing in stocks, then listen to Warren Buffet. "Put all your money in one basket... And then take good care of that basket." Only invest in industries/businesses that you know if you want to go this route.

Which in general is more secure...
Real estate is always tied to a piece of property. That in itself means that even if the market tanks, you are never quite penniless. However, the quicker returns in the next three years are, in my opinion, going to be in the stock market and in very rare real estate markets.

...and which would allow you to realize quicker returns?
Whichever one you know best. In both real estate and the stock market, the real money is made by knowing when to get into a deal and when to get out of it. The better you know your investments, the more likely you are to get the entry/exit points correct.

I can be a bit pedantic about investing, but it's only because I hate doing things the hard (and slow) way. And 401(k)s, mutual funds and the more traditional vehicles are usually the hardest way.

If you want to start doing your due diligence, check out a book called "The Millionaire Maker" by Loral Langemeier. For value-based stock investing (what Warren Buffet does), look up "The Intelligent Investor" by Benjamin Graham.

And always, remember the #1 rule of investing...


Rebecca

[yeikow]

That was a great post. Thanks Rebecca

[JMan]

I would echo all that is said here. Invest in what you know, and if you don't know it, get to know it. Either vehicle can be profitable, but you have to know what you're doing.

If it's stocks, read up on how to analyze chart formations, learn to recongnize when to buy and when to sell. Learn about how brokers work and shop around. There's a lot of information out there to absorb. Trade on paper first for a month or so using this knowlege without any real money at risk. See how you do. Buy low, sell high, and never get emotion tied up into stock preference - it's all numbers. Use them. You can advance into things like option trading and commodities which can be riskier, but also can be very fruitful if you know what you're doing.

If it's real estate, again know what you're getting into. With the current market, I'd go talk to some real estate agents about your local statistics - who's buying, how long are properties sitting on the market, etc. There may be some agents who have specialized in these types of purchases and if you can, find one.

In hot economies flipping is still viable, but some economies have stagnated. If you have cash on hand, property auctions may be a good buy for you, where you can pick up others' foreclosures and assume their mortgages. Check with lending institutions and courthouses.

Purchase Price + Fees + Fixup/Development Costs + Mortgage Costs for fixup term + Utility Costs for fixup term + any Lost Income = Amount Invested. Be sure you can sell for more than these costs to be profitable.

[Damon]

Stocks, mutual funds vs. Real estate


Warren Buffet vs. Donald Trump

It's like putting those two guys in the ring and seeing who would win

I agree with the above poster, it's all about which one you prefer and where your skills are at. You can win at both, neither is "better" than the other but they both require knowledge and skill of different sorts.

[Logicseeker]

The higher risk = bigger win is largely a myth.
What it is really about is swings and some stocks are highly volatile which means you can if you are lucky make large short-term wins. The expected value (EV in financial terms) might very well be the same for high-risk as for low-risk.

My advice is to know what you are doing and taking it slow in the beginning. If it seems to much to begin with put your energy into finding good investors and invest in their fonds. If you have the money real estate in a growing country is always good. The US seems to be declining though and it will probably get run over by China/India sometime in the future.

[hotwired]

I tend to use value type approach. How have I done? Unfortunately I've been a bit sloppy so far in the "tracking" department. I've since setup a spreadsheet for tracking 07. I use a screen that I setup with the following paramaters.

peg .5-1.25 (pe ratio / growth in earnings)
5 year growth 20-40%
ROE >15%
institutional ownership <40%
DE ratio <40%

Then I pick the most boring companies, usually eliminate complex or foreign companies (foreign is great to invest in, but single stocks of foreign companies are a bit risky imho becuase of the secondary risk of currency fluctuations),check their one year return, take a peek at the other financial data and make a decision. Also, check on quicken.com - Warren Buffet's pics based on discount to intrinsic value seem to fair pretty well. I've made 50% plus returns on two of them.