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The Single Best Investment For The Next Decade

August28, 2019

“For money you wouldn’t need for more than 10 years, which ONE of the following do you think would be the best way to invest it stocks, bonds, real estate, cash, gold/metals, or bitcoin/cryptocurrency?”

That question was recently asked of more than a thousand investors in a Bankratesurvey, and the winner by a large margin was real estate For every two respondents who answered stocks, there were more than three who said real estate is the way to go

Are these investors onto something? Have nancial planners been wrong all these years? For this column I mine the historical data for answers

On the face of it, the respondents to the survey need to go back to their history books, as pointed out inarecentcolumnbymycolleagueCateyHill Since 1890, US real estate has produced an annualized return above ination of just 0 4%, as judged by the Case-Shiller US National Home Price Index and the consumer-price index The S&P500 (or its predecessor indexes) did far better, outpacing ination at a 6 3% annualized rate (when including dividends)

Even long-term US Treasury Bonds outperformed real estate, producing an annualized ination-adjusted total return of 27% Check out the chart picturedhere

If this were the end of the story, then this column could end here

But it’s not the end The stock and bond markets are currently so overvalued that it’s not only possible, but downright plausible, that real estate will do better than either of these asset classes over the next decade

Maybe the investing public is smarter than we give them credit

Let’s start by considering bonds’ prospects over the next decade Currently the 10-year Treasury is yielding 2 1%, which is just 0 3 percentage points higher than the bre ven 10year ination rate (The break-even rate is the dierence between the yields on the nominal and ination-protected 10-yearTreasury) So the market’s best judgment right now is that your return above ination over the next decade will be just 0 3% annualized

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And if ination is worse than the market currently expects, bonds will do even worse

Next let’s consider stocks’ prospects Forecasting equity performance is much more dicult than in the case of bonds, given the far greater number of factors that can impact their returns But you should know that, according to almost all standard valuation metrics, stocks currently are somewhere between overvaluedandextremelyovervalued Furthermore, you cannotexplainawaythisovervaluationbecauseoflowinterestrates

Given this overvaluation, it’s entirely possible that stocks will join bonds over the next decade in falling far short of their historical averages. How far short? By way of a possible answer, I refer you to the 10-yearforecastcompiledbyResearchAliates They currently are projecting that the S&P 500 (including dividends) will produced an ination-adjusted return of just 0 5% annualized over the next decade, and that long-term US Treasury bonds will produce an ination-adjusted return of minus 07%

Or take the 7-yearforecastfromBoston-basedGMO They are projecting that the S&P 500 will produced an ination-adjusted total return of minus 4 2% between now and 2026, with US long-termTreasury bonds losing at a rate of 11% annualized

These are just projections, of course, and other rms are more bullish than these two But, at a minimum, these two rms’ forecasts suggest that the respondents to the Bankrate survey aren’t necessarily as ill-informed as might otherwise appear.

There’s one other factor that should be considered when deciding whether real estate or equities is the better bet for performance over the next decade: How will real estate perform during a major stock market decline? Given our all-too-fresh memories of real estate’s awful performance during the nancial crisis, you may be avoiding real estate because it’s even riskier than stocks

But real estate’s experience during the nancial crisis appears to be the exception rather than the rule In every other stock market bear market since the 1950s, the Case-Shiller Home Price Index rose in all but one And in that lone bear market prior to 2007in which the index did fall, it did so by just 0 4% (Idiscussedrealestate’sperformanceduringstockbear marketsinanarticleseveralyearsagoforBarron’s )

Furthermore, you should know that the Case-Shiller index has been less volatile than the stock market a lot less As measured by the standard deviation of annual returns, in fact, the CaseShiller index is only 40% as volatile as the overall stock market Perceptions to t ontrary that real estate is riskier than equities derive from the leverage we typically use when purchasing real estate Note carefully that the risk comes from the leverage, not real estate inherently

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Real estate during stock bear markets

Theleadersinyourhomeexperience AtBestCoastCollective,weempower youtomakesmartrealestatedecisions thatenrichyourlife

So if you were to believe there is a major stock bear market in the cards at some point in the next decade, you might choose real estate just because of its lower risk

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