Does the average investor fare better in stocks or real estate?

Over the last year, many commentators have noted that one may have been better off investing in something other than stock market given the 10 year return of a board based U.S. equities index would have returned you approximately nil. But the question arises, if not the stock market then what do you invest your money in?

For some, the question has been turned into an either or answer. Either you invest in the stock market or you invest into some other investment class altogether, ignoring that a healthy balance would serve one well. For most employed people, this other investment class would be real estate (for the entrepreneur, the answer has been, regardless of circumstance, the business; she of the constant need for cash). The either or analysis shows a certain simple-mindedness in thinking since real estate investing can include both investing physically in a real property or a REIT, which is a security.

But, the larger point remains, would an average investor done better investing in real estate or stock?

As stock market investors, we are a pretty poor lot. Using a 20 year period of study, which removes the selection bias of picking a 10 year window with the end date being market bottom,  DALBAR’s analysis estimates that an average investor earned a paltry 1.87% a per annum. The poor results have been attributed to investors investing emotionally and buyin high and selling low.

As real estate investors, we may not be performing that much better. The U.S. Census Bureau took a comprehensive survey of property owners and managers as part of its Property Owners & Managers Survey (POMS) in 1995. The date itself is pretty important since the survey was taken during “normal” market conditions. The source is also important since the Census Bureau has no particular pro or con bias.

Of those surveyed, and regardless of the type of property unit, only 41.4% of all property owners reported a profit. 16.2% of those surveyed answered that they broke even; 26.7% reported a loss and 15.7% did not know whether they made money, broke even or lost money. In other words, the majority of real estate owners lost money. The only downside of POMS is that it does not break down rate of return on real estate investments (I suspect this would be much too difficult to conduct given types of units, geographic differences etc.)

The statistics get a bit grimmer if we begin to drill down on the data.  More people surveyed reported they lost money investing in single-unit condominium units than made money (196,787 lost vs. 192,976 made): a troubling statistic since many real estate investors in large urban regions can only afford to purchase a condo. Only 45% of those people surveyed who owned or managed over 50 units reported a profit; this is surprising since one assumes that a property owner in this scale could make money by sheer volume alone.

As an investment class, some tend to gravitate towards real estate over stock investing because of the tangibleness of the asset. You can touch it, feel it and taste it (if you have a taste for dirt and brick). One also understands the appreciation factor in real estate in normal times but can the same argument not be made for many stocks (especially dividend paying stocks) and what good is appreciation if you are cash flow negative every month on your real estate investment?

A tentative observation can be drawn that, reading DALBAR and POMS together, stock market investing and real estate investing are neither, in and of themselves, good or bad things. Neither asset class has a meaning. Instead, the moral of the story seems to be its not what you invest in but how you invest in it. Most would find it shocking that nearly 16% of those surveyed did not even know where they stood with their real estate investments.  It appears that, regardless of asset class, the average investor has a lot of work to do to become competent managers of their own money.