Real Estate vs Equities
Writing in Valueresearchonline, Aarati Krishnan says “Equity funds often do beat real estate, but it is all about behaviour and perception of investors”. I am not sure as to how many investors agree with that, but that is not the point.
In that article she correctly points out that while investors in Real Estate not only are willing to put in a bigger lumpsum but also keep paying EMI’s which are way bigger than what most equity fund SIP’s are. The affect of leverage also adds to the returns (especially since until recently, there was hardly any fall in prices).
But how correct is one to compare investing in real estate vs investing in mutual funds (equities). I for one believe that there are quite a few.
To start with, for most, investing in real estate means owning their own shelter. Of course, there are people who buy second / third or even fourth home, but for majority, one barely is able to see through one.
When one buys a home, he buys not with the intention that this shall provide him the money required for Retirement or for his Daughter’s Wedding or her Education. He buys for the simple reason that he believes that buying his own home not only is a viable and wonderful investment (that shall keep appreciating) but also a sign of prosperity and sign of success.
While in the older times, people waited till they nearly got to retirement age before many actually bought / constructed his house, over time, people have become more faster in acquiring a house regardless of whether he requires one immediately or not. After all, what is the whole point in waiting when its so easy to get loans and with prices that keep increasing, it seemed that waiting was a losing proposition.
The bigger question that the article raises is that if one made the same kind of investment in equities, one could have got similar / better return. But there is a catch and even the Author seems to agree with it when she says “people seldom take loans to make equity-fund investments (it’s not a great idea anyway)”
Much of the investment that goes into real estate is by way of Loans which can compound the returns even more. While the author does say “its not a great idea to invest on borrowed money”, its actually tough if you really wanted to do it since no banks will lend money for investing in stocks and shares. Also, unless you believe that the return from the investment is way higher than the interest cost, it makes no sense.
In fact, the very reason a lot of small investors are attracted to stock futures and options lies in its ability to provide massive returns if one is right for what is assumed to be a small risk.
Since unlike real estate, the very idea of investing in Equities is to achieve a goal, its actually important that you have a plan since there is no guarantee that markets will be where you would want them to be when the time comes to withdraw.
The draw-downs in Real Estate does not matter since the investment is not with the aim to reaching a specific goal. On the other hand, when you are investing in Equities with the understanding that this shall help in reaching one’s goals, its equally important to be able to time the market (on a broad level) since otherwise you may start at the worst point (to invest) and need the money in the best time (to invest).
While most advisors and fund managers harp upon SIP (Systematic Investment Plan), if you are investing for a Goal, do take into account that a plan of how you exit is also as important. After all, our needs will not match with market cycles and hence one needs to plan the same.
Its hence imperative that you have a proper asset allocation with multiple plans of action on how you shall deal with various stages of market and how they shall align with your goals. After all, what is the point in saving if it cannot come to use when one really requires the same.
Our parents and grand parents and their parents could go through various stages in life far more comfortably, not because they earned more or that they were skilful investors – but because they were wise enough to live within their means and save for long periods.
Remember, those days, there were no financial planners to periodically slice away a piece of the Nest egg that was being built to meet future goals.
Specific investment goals are laid out as a hook to lure prospects. These are for the benefit of the planner – Financial Planning helps in selling. It is just a selling tool & nothing more. Moreover, it would be interesting to find out how many clients have really achieved their financial goals because of their Financial Planner(s).