What stock investors can learn from real estate buyers...by Dr. Robert Votruba

Many agree that one of the best long-term investments one can make is in real estate.  Maybe it’s the house they have lived in for the past 30 years, or a rental property acquired decades ago, either way people associate real estate with competitive rates of return.  Interestingly, it could be that the behaviors associated with real estate investing produce the satisfying reward, more so than the selection of an attractive property or timely renovation.

Real estate is the ultimate long-term investment.  Most people, homeowners or investors, hold properties for decades.  The story is quite different for investors in individual stocks who on average hold a stock for 4 months (in the 1960’s the average holding period for stocks was 8 years).  Even mutual fund investors’ patience pales in comparison to real estate holders since only 30% will hold their fund for more than two years.

Location aside, perhaps the absence of distractions is the real estate investor’s best friend.  People certainly don’t track the value of their home hourly on their iPhones.  And, even though services such as Zillow and Trulia exist to give more pricing transparency, any property owner knows that the true value of their holding can only be determined by how much someone else is willing to pay for it.  In short, most property owners pay no mind to the value of their investment until it is time to sell, making them the ultimate long-term investors.

Investing in the stock market, where distractions are plentiful, might be the polar opposite.  Values and prices are force fed to us 24 hours a day, not to mention the hyperbolic headlines and excitable talking heads labeling near every downturn as a “market meltdown”.  And, we all seem to remember the highest value our accounts reached and use that as our measuring stick going forward.

If only the average investor could find it within themselves to show the same stoicism towards their retirement accounts as they do towards real estate, they would easily be elevated to above average.  Furthermore, the long-term rewards may surprise everyone.  Consider a home that was purchased in 1988 for $100,000 and today is worth $1,000,000.  That impressive growth, and maybe common in the tri-state area, amounts to about 8% per year.  Of course, this assumes no costs are paid along the way (property taxes, insurance, maintenance, etc.).  Factor those in and we are likely closer to 6% per year over 30 years.  During that same time frame the market, as measured by the S&P 500, averaged a touch over 10% a year.  Take away some taxes and management fees and you are still very likely ahead of the real estate.  The hard part for the stock investor was staying invested when account values dropped by over 50% on two separate occasions (2000 – 2002, and 2008 - 2009), not to mention all the other “market meltdowns” endured during that time frame.

To be sure, the point of the comparison is not to suggest that an investment in the S&P 500 is the superior of the two, but to demonstrate the old axiom that it is “time IN” the market, not “timing” that generates long term wealth.  This lesson seems timely as we end the year during some of the most volatile times on record, and a time when it appears as though the longest bull market on record has reached its end.

Breaking a streak of nine consecutive “up” years, the S&P 500 ended 2018 in negative territory, after suffering its worst December since the Great Depression.  At one point during the month the market was off 19.93% from its record high, set in September.  To be considered a “bear market” a stock index must fall 20% from its previous high.  At this point, the NASDAQ, international and small cap stocks (and oil prices) have all reached that point, with the S&P missing the 20% threshold by a razor-thin margin.

Of course, bear markets and “corrections” (declines of 10% or more) have been common occurrences throughout history and are thought to be the price we pay to enjoy higher returns over the long term.  In fact, since 1948 the market has experienced a 10% pull back about once a year, and a 20% decline about once every six years.  So, by some measures the recent declines were long overdue since the last 20%+ decline occurred during the financial crisis of 2008 - 2009.  On average, bear markets have lasted a little over a year.  And while the S&P 500 has gained an average of 9.8% per year over the past 50 years, 11 of those 50 years (22%) were negative.  Taken further, when broken down into days, over the past 50 years (12,611 trading days) the split between “up” and “down” trading days was “up” 53% and “down” 47%.  “Down days” have always been a normal part of investing.

The recent weakness in the market has been fueled by interest rate policy, decelerating global growth and political uncertainty.  Though it was no surprise and has been telegraphed virtually all year, the market seems to have reacted negatively to rising short-term interest rates and to the continued reduction of the Federal Reserve’s (the Fed) balance sheet.  To recap, to help revive the economy after the 2008 crisis the Fed held interest rates at historic lows for some time.  This policy helped to make borrowing more affordable and drove investors to buy stocks.  In hindsight, it seems to have been effective in getting our economy back on track.  Now that we find ourselves on mostly solid ground the Fed must play a delicate game of taking away the stimulus slowly before the economy overheats.  Basically, they have to take away the punch bowl before things get crazy, and a major hangover ensues.

Talks of trade wars and continued uncertainty surrounding Brexit has put pressure on global growth.  This, coupled with political turmoil in the U.S., has caused many forecasters to revise their 2019 growth estimates downward.  As such, many have been calling on the Fed to reconsider its path on the future direction of interest rates.  Simply put, many (including the President) want the Fed to keep the punch bowl out for a while longer.

Though continued volatility and potential downward pressure seem likely in the short term, the underpinnings of the U.S. economy paint a more optimistic picture than the recent activity in the stock market indicates.  Unemployment remains at its lowest levels since 1969, while retail sales over the holiday season rose a solid 5.1% (the strongest growth rate in 6 years).  The U.S. economy (as measured by GDP) has been growing by over 3% for the past 6 months, a strong figure considering we haven’t seen a full year of economic growth of more than 3% since 2005.  Though the “sugar high” of the tax cuts will be behind us in 2019, corporate earnings are expected to grow by 6%.  And, after this recent sell off, few can argue that stocks are overvalued.

Oftentimes someone’s “risk tolerance” is measured academically, through discussions of time horizons and “what if” scenarios (i.e. how would you react if the market dropped 10%, etc.).  Yet, like a flight simulator, one does not truly know how much they will sweat until they land a real airplane.  It is thought that people overestimate their risk tolerance (because they feel more confident) when markets are rising and underestimate it when the market falls (out of fear).  It is this behavior that gave birth to one of Warren Buffet’s most famous bits of advice – to be fearful when others are greedy and greedy with others are fearful.

While the stock market performance is the measurement that most people seem to fall back on when measuring the success of their financial plan, it should be remembered that often investments in stocks represent just one component of a well-rounded plan.  Financial plans, especially for those with shorter term goals, should also contain assets with guarantees that help to provide shelter from the storm.  And, to be clear, at National Financial Network we never create a plan with the implicit assumption that the stock market will only rise.

In 2012 Superstorm Sandy devastated the east coast of the United States.  At the time, it was the costliest hurricane on record in the U.S., affecting 24 states, leaving thousands without electricity for weeks, and sadly killing many.  With all of this destruction surrounding property owners at the time, which was nothing short of the equivalent of the crash of 1987 (Black Monday) when the stock market fell over 20% in one day (equal to a near 5,000 point drop in the Dow Jones Industrial average today), there was little talk about plummeting real estate prices and property owners selling at what they felt were temporarily depressed prices.  They knew prices would rebound, and they surely did.  Few panic when it comes to real estate investing, yet those very same people often shutter when their investment portfolios move in any direction aside from “up”.  Odds are, your investment portfolio has a similar time horizon as your real estate.  So, the next time the financial media launches a “market meltdown” special after an ugly day on Wall Street, simply behave as a real estate investor would.

Written by Robert C. Votruba, Ph.D., Director of Investments, National Financial Network LLC. Registered Principal and Financial Advisor of Park Avenue Securities LLC (PAS), 990 Stewart Avenue, Suite 200. Garden City, NY 11530. Securities products and advisory services are offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. National Financial Network LLC is not an affiliate or subsidiary of PAS or Guardian.
Opinions expressed herein are not necessarily those of Guardian or Park Avenue Securities. Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security.
Data Source: FactSet

S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the
U.S. equities market. Indices are unmanaged and one cannot invest directly in an index. Each company’s security affects the index in proportion to its market value. NASDAQ Composite Index is a market value-weighted index that measures all NASDAQ domestic and non-U.S. based common stocks listed on the NASDAQ stock market. Dow Jones Industrial Average is a widely-used indicator of the overall condition of the stock market, a price-weight- ed average of 30 actively traded blue chip stocks, primarily industrials, but also includes financial, leisure and other service oriented firms. Data and rates used were indicative of market conditions as of the date shown and compiled by briefing.com. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. Past performance is not a guarantee of future results. Russell 2000 Index measures the performance of the smallest 2,000 companies in the Russell 3000 Index of the 3,000 largest U.S. companies in terms of market capitalization. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. Chicago Board Options Exchange Volatility Index (VIX) tracks the expected volatility in the S&P 500 Index over the next 30 days. A higher number indicates greater volatility.

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