One of the most common sentiments the general public has about investing is that there is too much risk. This sentiment, for the inexperienced, is enough to turn one off from investing in any equities and making their money work for them. Instead, they either save money in mediocre inflation-trailing savings accounts or chequings accounts that provide essentially nothing. There is a certain commendable success that should be noted when someone is able to start and continue saving, but if you aren't making much from those savings, the good act of saving is not doing a whole lot of good for you.
A better alternative that those who have been saving for a bit of time often turn to is real estate. The idea is that real estate is physical and will eventually always go up. I have a couple of qualms about this solution, even if it does prove to be profitable for some.
First, is that real estate is still just one sector of any economy, and if you put all your savings into real estate, you are actually taking on a lot more risk than someone who owns a huge amount of stock, but distributed among different industries and geographical areas. Think about it - you are buying a single house in a single neighborhood in just one city of one country. And if it is an investment property, your only source of income depends entirely on how appealing that one house in that one neighborhood in that one city of that one country is to potential tenants, and would often be related to the job market nearby. Expanding the investment web to even cover only real estate, but within a whole province, already makes an investment less risky as you have diversity of neighborhoods and cities and potentially dependent industries.
My second qualm is that the justification for real estate being physical, and therefore "real", can be applied to equities. If you look at balance sheets (accounting table of assets and liabilities) of companies, you can typically determine exactly how much of each share is attributable to physical things. This includes not just inventory and equipment, but also real estate and buildings, as most companies need to have land and buildings to operate. For banks, these are often neighborhood branches and cash reserves. Manufacturing and industrial companies can have large plants in addition to proprietary manufacturing equipment and processes. And, of course, there are real estate investment trusts (REITs) that will own property that they rent out to tenants, whether residential, commercial or industrial. The trick is that when you buy a stock, doing a quick bit of research on the property the business owns will give you opportunity to get that physical asset comfort. If the company owns property near you, you can even visit those properties to check out the condition and evaluate the neighborhood, just as you would when looking to buy a house.
The one thing that is truly hard to quantify when looking at balance sheets is an asset known as goodwill. This is where things like intellectual property (IP) and brand cachet would be valued, and of course could change drastically in short time. Important patents expiring or a publicized fraud case against a company could cause goodwill to suddenly drop. It is not unusual for companies in the technology and pharmaceutical sectors to have most of their actual company value attributed to goodwill, because a lot of the reason for the company to exist is due to virtual presence or intangibles. As such, it takes a lot more investigation to be sure when investing in these sectors.
Another common justification of real estate is that it always goes up, but this too applies to equities. The American stock markets are at record highs today, which were seen right before the financial crisis. So in just under a decade, all of those extreme losses have recovered. In fact, if you hold dividend-paying stocks, you would have seen the full recovery quite a bit sooner as you would have still been collecting dividends for the past decade, which can add up quickly (see Compounding Growth). Real estate investors (or "flippers", as some are appropriately named) leading up to the financial crisis in the late 2000's had the mindset that real estate would continue going up indefinitely. Some eventually paid the price of having multiple properties underwater in debt and had to hand over the keys to those properties and declare bankruptcy. Even today, there are still shows on television that idealize house flippers as a great way to make money. But guess what? House prices too have only just recovered since the crisis, but do not have the benefit of paying you dividends unless you put the time and effort in to manage rental properties.
Finally, you can't get rid of real estate very fast, and there are huge fees associated with buying and selling property. The land transfer tax, sales tax, legal fees, inspections, moving costs and other expenses happen for every transaction. With equities, you just need to log into your online discount broker, input the trade and pay $10 or less. The ease and liquidity of trading equities makes it much less prone to surprises. For real estate, as a seller, you may have to take tens of thousands less than your list price to sell your property. As a buyer, you may have to enter a heated bidding war with other buyers for the same house. When trading equities, you know the bid/ask spread, and you can set your limit for a sale or purchase and it will automatically trigger if it gets there. All things equal, this makes even the transaction process of buying and selling real estate one that is inherently much more risky.
Consider what many see as a socially-acceptable risk and compare it to the risk associated with businesses that many are regular patrons of. Whether it be fast food, gas stations, supermarkets or banks, it's important to keep things in perspective.