Ready to start building wealth?
You’ve paid off your debt and are now ready to put that extra cash to work.
What’s the best way to invest?
Real Estate is not a bad option. Buying houses and renting them out, or buying houses that need updating and then re-selling for a profit are the two most popular ways people invest in real estate.
You can’t help notice those late-night infomercials with the guy promising to turn you into a real estate magnate within six months and no money down.
You can’t help but wonder if there’s something to it.
But you’re smarter than that. You know there’s no free lunch.
When it comes to real estate investing, that is definitely true.
But friends, I gotta tell ya…. investing in the world economy via the stock and bond markets is about the closest thing to a free lunch that there is.
Capitalism gets a bad rap these days, but the truth is that capitalism -especially American business- is the greatest wealth-generating machine the world has ever known.
And it has never been easier for the average person to get a piece of that action.
Of course there’s a major caveat to that — and I’ll get to it in a bit — but first, I want to dispel the notion that stock market investing is only for the rich and sophisticated chardonnay sippers, or only for those guys in button down shirts that enjoy building excel spreadsheets.
Or that it’s super risky and a quick way to lose your hard-earned nest egg. It can be that, I grant you, but it doesn’t have to be.
Read on to find out why investing in stocks is a better bet than real estate for the average investor.
Hard work vs No work
Growing your wealth through acquiring rental properties and renting them out for a profit takes a tremendous amount of time and effort. Successfully investing in the stock market takes virtually no time or effort.
Scouring the market to find an undervalued gem of a house in a safe enough neighborhood takes time and effort. Plus, you’ve got to beat out the other wannabe landlords also looking for the undervalued gem.
Then once you’ve got the house you got to rehab it. Then interview potential tenants and do background checks. Once they move in, you’re on call to fix leaking toilets and jammed garbage disposals. And the fridge will crap out and you get to replace it.
Investing in a balanced portfolio of index funds, using sound principles of asset allocation, takes less than an hour to set up, and requires about 20 minutes per year to maintain.
It is literally that easy.
Mad Skillz vs No Skillz
Investing in real estate requires mastery of a wide-variety of skills. Investing in the stock market takes no skill at all.
To be successful in real estate requires understanding the market. Understanding what renters are looking for. Being able to spot the difference between a bargain and a money pit.
There’s the bookkeeping, keeping track of expenditures, managing cash flow.
So that your profits don’t leak out by paying a plumber or electrician every time something comes up, you’ve got to learn how to fix things yourself.
Selecting tenants that will pay the rent on time and will take care of your property requires people skills . You need to be able to accurately judge a person’s character and maintain friendly relationships.
Equally important is a thorough knowledge of landlord-tenant laws and the ability to remove a bad tenant without having them trash the place in retribution.
In contrast, investing in stocks and bonds requires nothing more than the ability to calculate percentages to diversify your holdings into a balanced portfolio of index funds.
Fat Stacks Up Front
Real estate investing requires a big chunk of money to get started. You can get started investing in stocks for $50 a month.
This one should be obvious. Getting started in real estate requires significant capital investment.
Not only do you need a minimum of 10% percent of a down payment on a house, you also need funds to spruce up the house to get it ready to rent. New paint, new carpet, floor refinishing, needed repairs, etc. Even if you do the work yourself, you’re still looking at a significant outlay.
On top of that you’ve got to carry the mortgage until you’ve got a tenant. And you will need to have some funds set aside for future repairs and maintenance.
Exactly how much cash up front you will need can vary greatly, depending on the real estate market you are in, and the condition of the properties you buy, but a bare minimum of $15 to $20 thousand should be expected. Just to get started.
But to invest in the stock market, you could set up a complete balanced portfolio of low-cost Exchanged Traded Funds (ETF’s), covering the spectrum of domestic and international bonds, domestic and international stocks and fixed income, for about $400.
For about $50 you could get started with your first international stock ETF.
Number of Eggs in One Basket
Ask any investor, the cardinal rule in investing is diversification of assets. If you’re a small-time landlord with a portfolio of rental homes in a single market, that’s called “all your eggs in one basket.” It’s riskier than you think.
Diversification of assets in the stock market is easy peasy.
The principle of asset allocation — that is, divvying up your dollars among different asset classes, such as stocks, bonds and cash — has been shown by several studies to be the most important factor in investment returns.
When you invest in index funds and broad market ETF’s, you are spreading your investment over the broadest possible field. It is many eggs in many different baskets.
While there is no one-size-fits-all perfect answer to asset allocation, a general rule of thumb to follow is to allocate relatively more to higher growth and higher risk assets, such as stocks, when you are younger, and transition to slower growth, and lower risk assets, such as bonds and cash, as you get older and closer to retirement.
The main point to remember at this point is that you can adjust your asset allocation — which eggs to put in which baskets- according to the level of risk you feel comfortable with. Just remain aware that lower risk strategies comes with the potential for lower returns.
Stuck with a Lemon
If you get a bad tenant who knows their way around the landlord-tenant laws and doesn’t pay the rent and trashes your house, you’re stuck with serious out of pocket expenses.
If you pick a bad stock that tanks, you sell it and move on. Or, if it’s a great dividend-paying company you just load up with more shares at a sweet discount.
The beauty of index funds and broad-market ETFs is that any stock that ends up being a lemon comprises a very small portion of the overall holding. You will never notice its impact.
The individual stock composition of index funds is constantly changing to comprise a basket of stocks that essentially mirror the general overall segment of the market that it is associated with.
Tl;dr: with index funds, there is no such thing as lemons to get stuck with.
The Opposite of Liquid
The ease with which you can pull your money out of an investment is called liquidity. Stocks are liquid. Real Estate is definitely NOT liquid.
Once you have committed to investing in real estate, it is not easy to get out of it, or switch gears if you should want to.
There is significant expense involved in buying and selling real estate. You will most likely pay thousands in realtor fees buying or selling. It also costs thousands of dollars to take out a mortage.
Stock and bond investing is totally different. You can take your money out of the market at any time, and it doesn’t cost you a dime.
Ideally, you want to buy and hold your investments for the long term. You should only sell when you are good and ready.
With stocks and bonds — unlike real estate — you can pick up and move to a different part of the country — or even a different country — and your investments will not be affected.
Close to a Free Lunch
So there you have it. My top 6 reasons why you should forget your visions of building a real estate empire (unless that is really your dream — then by all means, go for it!).
Instead, I believe you should invest in stocks, bonds, REITs, and a smidgen of precious metals, and then pull the covers over your head and go back to bed.
The simplest, safest, and most cost-effective way to invest in the stock market is with a small collection of index funds through Vanguard. Index funds allow you to invest in a wide range of asset classes at rock-bottom cost.
Alexander Green’s “Gone Fishing Portfolio” is the best implementation of this strategy that I have come across.
Based on a Nobel prize-winning strategy of asset allocation that will reduce your risk and maximize your returns — no matter what the market is doing.
And whatever you do, do NOT watch financial news of any kind on tv, or the internet or the newspapers. Forget they exist. They certainly do not exist to help you make better investing decisions. Trust me on that.
Now, about that caveat I mentioned up above: I said that investing in the world stock and bond markets are the closest thing to a free lunch that there is.
The caveat to that is: only if you don’t sell when the markets tank. (Which they will, and you shouldn’t worry about it.)
Simply follow the “Gone Fishing Portfolio” plan, and you will sleep soundly at night, outperform the S&P 500 over the long haul, and spend about 20 minutes per year managing your investments.
And that is about as close to a free lunch as you’re gonna get. (That’s legal, anyway.)
To get started building your financial future, I recommend opening an investment account at Vanguard.
The Gone Fishing Portfolio book will guide you in selecting the exact Vanguard funds to buy, and how much to buy.