Real Estate v Stock as an Investment

If you do a search on the Internet, you will discover that the majority of articles argue that stocks have smashed real estate as a long-term investment. They will quote statistics by various companies which are totally focused on stocks. The bias is blatant. While there clearly are years in which stocks have out performed real estate, one of the major reasons I argue real estate is a better long term investment is ignored in all these comparisons on the Internet.

This may be the best single reason to invest in real estate. Some retirees have lost much of their retirement fund in a crashing stock market (April 2001), many have lost much of their retirement as the result of tech hyperbole pushed by venture capitalists and major brokerage houses, and some have lost all of their retirement fund through corporate accounting fraud. This last one is the most important reason to invest in real estate, or at least not to put all your eggs in the stock market basket. This makes real estate not just a little better as an investment but 10,000 times better. How can you compare two investments where one can just disappear through economic disaster, fraud, or other criminal acts, and the other cannot disappear because it is a piece of the earth. Real estate simply doesn’t suffer the kind of fraud and non-economic tragedies of stocks.

Consider the following companies are just some of the major companies involved in either accounting fraud or corporate fraud of various kinds: Adelphia, AES, Duke Energy, El Paso, Merrill Lynch, Reliant Energy, Rite Aid, Parmalat, AOL Time Warner, Dollar General, PNC Bank, Cendant, Citigroup, Computer Associates, General Electric, ImClone, Peregrin, Xerox, Bristol Myers, HPL, JP Morgan Chase, Kmart, Lucent, MicroStrategy, Network Associates, Tyco, Enron, Global Crossing, Halliburton, Omnimedia, Merck, Qwest, Sunbeam, and there are many more, including major accounting firms and major stock brokerage houses. The losses associated with these companies is in the billions. These are losses suffered by millions of hard working Americans. These losses have nothing to do with a market that turned down. These losses have nothing to do with our economy or investing principles. These are losses people have suffered because of corporate and accounting fraud. How good does the stock market look now? Dell lost $50 billion dollars in market value in a single day, because quarterly profits did not make expectations. In the same day’s news, KPMG was in court for the largest accounting fraud in U.S. history. How safe is your retirement fund?

Almost daily I see articles in newspapers around the country about more scandals, another stock brokerage, financial services provider, or mutual fund paying some extraordinary penalty or huge settlement for fraud, misrepresentation, or some other criminal violations. The Wall Street Journal reported on August 29, 2006 serious problems at Ameriprise, formerly known as American Express Financial Advisors. Securities America, an arm of Ameriprise, settled for $22 million dollars. The story is that David McFadden, a hot shot broker for Securities America was lying to Exxon employees about their retirement funds. Under McFadden’s management, Bradley Simon’s retirement fund dwindled from $700,000 to $267,000. Or take another of McFadden’s clients, 73-year old Pat Salatich, a nurse for 25 years at Exxon. She deposited $565,383 with McFadden in 2001, and after only withdrawing $189,000, she learned there was only $73,000 in the account before she stopped the bleeding. She now lives on about $1,500 a month in social security.

Ron and Pam Yandell of Mansfield, Texas, turned over their $1.4 million retirement fund to a stockbroker who invested in risky tech stocks without their approval. They lost $230,000 in the tech crash. After a five year legal battle and lots of costs and stress, they won an award of $990,000 against their stockbroker, but no one can find him to collect it. He’s disappeared. These kinds of cases are a dime a dozen.

While real estate is subject to dramatic down turns in the real estate market (which means the economy has tanked and most likely stocks too), that happens rarely compared to the down turns in the stock market and all the corporate fraud. Real estate does not have the wild roller coaster rides that stocks have almost daily. More significantly in this day and age, it does not have to suffer the fraud and scandal of someone managing (and losing) it for you.

Look around. Real estate is everywhere, and someone owns each parcel. It cannot disappear like the value of a stock certificate. While there can be disasters and acts of God that could cause you losses in your real estate, you can insure yourself against such things with very small insurance premiums. Does your stock broker personally guarantee you will not lose your stock value, or does he offer insurance to cover you against losses?