Real Estate vs. Stocks: Which is Better for Young Investors?

Olivia Clifford |

Real Estate vs. Stocks: Which is Better for Young Investors?When it comes to investing there are many avenues you can choose to go down, particularly when it comes to first time investors. Two of the most common asset types that investors lean toward are real estate and stocks. In the past, from the average annual returns calculated from 1978 to 2004, the stock market was averaging returns of 13.4 percent compared to the 8.4 percent average annual returns of real estate investments as noted by CNN Money.

Obviously, those numbers don't factor in the most recent effects of the market crash from 2007. According to Standard & Poor's, the S&P 500 has provided an average annual price return of 3.48 percent over the past five years. For real estate, Zillow.com estimates that an average growth rate of around 3 percent per year is a realistic expectation, depending on inflation.

When weighing the pros and cons of these two markets, there are various financial and personal aspects to consider before investing your money.

Advantages of Investing in Stocks

Investing in the stock market has many distinct advantages, which can be very appealing to first-time investors. Historically, stocks were limited to those who could afford to pay for full—service brokerages, but nowadays, with the rise of more discount brokerages, it’s a whole different ball game. Many young people gravitate towards stocks because it requires a much smaller initial investment as well as being easier to diversify.

Stocks are also very advantageous for younger investors due to the fact that they are much less hands-on and very liquid. This is an advantage for young investors that still holds true today. Certain stocks also have the ability to pay out dividends and cash distributions to investors in addition to capital gains. Dividends can help guarantee real wealth through the power of compounded interest over time.

Risks for Stock Investors

One of the major downsides to investing in stocks is the threat the market is susceptible to extreme fluctuations, as evident by increased volatility over the past decade. Its capricious nature, compounded with the psychological components of active traders and individual investors, can make it a hard market to navigate. Through there is a chance for large investment returns, it takes discipline and not acting on rash emotions to invest successfully, which can be hard for many people, particularly younger and more inexperienced investors.

Considerations When Investing In Real Estate

With that in mind, many prefer investing in the real estate market, particularly home ownership and residential properties. Though it can cost more to make the initial investment, as well as maintaining the investment by having to pay costs such as insurance, taxes, utilities, maintenance etc., historically real estate is considered a smarter investment for the long term. It’s a more stable and tangible investment with longer cycles where the security is derived from the investor’s hands-on involvement. That, as well as its leverage potential in the form of mortgages and other home loans, makes it an appealing option for those looking for a more conservative investment.

Though many experts are saying that investments in real estate are the way to go, overall in the last five to ten years, the stock market has continually been outperforming the real estate market in average annual returns. In the end it all comes down to personality preferences and style when choosing which avenue of investment best suites you. Investors who display more risk tolerance, and prefer the shorter term cycles may gravitate towards the stock market. While on the other hand, those who are a looking for longer term investments as well as the emotional benefits that come from owning your own home may gravitate towards real estate.

[Image via Flickr]

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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