Stocks and property are two of the most common asset classes filling the portfolios of savers and retirees. Index funds allow investors to profit from the stock price appreciation of hundreds of publicly traded companies while real estate provides an appreciating asset that can be lived in or subsidized through tenets. When it comes to choosing either index funds or real estate funds, the investment that makes the most sense for you comes down to your individual goals. Read on to learn more about each investment. Or, if you’re ready to start working toward your goals today, contact our team of financial advisors at Good Life Mt. Pleasant today.
Pros of Investing in Index Funds
An index fund investment is often considered a low-risk way to procure long-term returns. Of course, these results are never guaranteed, but index funds offer a few other benefits as well.
- More Seamlessly Liquidated – One of the biggest perks of index funds is the ability to sell them for cash should the need arise. If you’re investing in index ETFs, you can sell shares from your brokerage account anytime during open market hours. If you are able to sell your share, the trade will take two days to settle; afterward, you can withdraw the cash from your brokerage account.
- Generally Lower Acquisition Costs – Buying and selling index funds is very often less expensive compared to real estate. And now that most stock brokerages have removed commission, many investors find them even more attractive. Many broad market index funds carry expense ratios of just a few basis points. For example, if $100,000 is invested into an index fund with a 0.03% expense rate, only $3,000 will go toward management fees.
- Exposure to Multiple Asset Classes – Index funds are available for all kinds of assets; large, mid, and small-cap companies, bonds and fixed income securities, sectors like banks or technology, and even foreign countries and markets. You can even gain exposure to residential and commercial real estate through Real Estate Investment Trusts (REITs).
Cons of Investing in Index Funds
- Not Seeking Alpha – Index funds only seek to match the return of their underlying index. Index funds are affordable because there’s no fund manager selecting stocks, but investors understand that the goal is basic market returns, not outperformance.
- Can Experience Volatility – Index funds are available for all hundreds of little slices of the market, but many sectors trade in lockstep, and the market as a whole tends to rise and fall in unison. Index funds offer diversification through many different stocks, but volatility is still frequent and index funds can lose value rapidly in bear markets.
Pros of Investing in Real Estate
Real estate is a unique asset class with its own pros and cons. Here are a few of the benefits:
- Less Volatility Than Stocks – Even broadly diversified index funds suffer from bouts of volatility when corrections or bear markets set in. Real estate isn’t immune from significant price swings, but property values tend to gyrate less when compared to stock prices.
- Potential For High Returns – As we’ve seen in the last two years, property values can appreciate rapidly, especially in desirable areas close to large and midsize cities. Property is often a crucial piece in a retiree’s nest egg.
- Favorable Tax Treatment – Buying, selling, and owning property often comes with tax advantages. For example, selling a primary residence often allows a property owner to deduct a considerable profit—depending on the value–from capital gains taxation.
Cons of Investing in Real Estate
Real estate has several disadvantages over stocks, especially if you don’t plan on living in it for a while. Consider these factors before buying any type of property.
- Highly Illiquid – Buying and selling property is tedious, and transactions can’t be processed instantly as a stock trade can. In a cool market, property can often take a while to receive a bid, and the sale will take weeks or longer to process.
- Expensive Transaction Costs – When property changes hands, many different hands enter the cookie jar. Buyers need a down payment and will owe fees for insurance and closing costs. Sellers have to pay realtors too, plus inspection fees, cleaning/repairs, and taxes.
- Maintenance Required – A share of an index fund will never need a new washing machine. Owning property is a commitment and requires frequent upkeep, repairs, and other time-consuming (and expensive) maintenance.
Diversify Your Portfolio with Index Funds and Real Estate
Which asset class is better? It’s a matter of perspective as both index funds and real estate have distinct advantages and disadvantages. Another approach might be using both asset classes in tandem to form a more diversified portfolio, but it’s important to contact a financial advisor so that you can feel most comfortable with whichever choice you make.
If owning a home doesn’t make sense right now, putting money into index funds through a 401(k) is a great alternative. Likewise, if you’re maxing out your retirement account and have the funds for a down payment, owning a house likely makes more sense than renting. The decision shouldn’t be either-or, but a question of which asset class deserves more current attention.
Get Started Today
We hope you enjoyed this guide to index funds vs. real estate. If you’re ready to take the next step and decide which investment is the right choice for you, contact our team of financial advisors at Good Life Mt. Pleasant. We will discuss your options and provide you with all the information you need to feel comfortable with whichever choice you make. Are you ready to start working toward your financial goals? Contact us today!
The opinions voiced are for general information only and are not intended to provide specific tax advice or recommendations for any individual.
Investing in mutual funds involves risks, including possible loss of principal. Fund value will fluctuate with market conditions and it may not achieve its investment objective.
The fund’s concentrated holdings will subject it to greater volatility than a fund that invests more broadly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
No strategy assures or protects against loss.