This post is part of the pros vs cons debate series around investing.
Today’s question is: Which is the better investment: stocks or real estate?
Let me start by saying that you can get ahead by using either stocks or real estate. And as you go into your experience as an investor, you should aim to do both.
BUT if you are just getting started and investing for the long term by putting your money to work for you, the best place to start is with stocks.
Easy to access
Stocks are an easier investment class to get into than starting real estate.
You can purchase individual stocks or funds directly through a retirement plan offered by your employer.
You also have the option of investing on your own with any public traded stocks if you open an account at a brokerage house like E*trade, Fidelity or Charles Schwab.
If you decide to start investing in a retirement account like a 457, 401k or 407, you can enjoy pretax savings.
You’ll get the benefit of investing and growing your money without having to pay federal, state and social security taxes.
You will have to pay taxes on the balance of those funds when you withdraw it, but that’s after you have taken advantage of decades of compounding interest working in your favor.
Less to learn upfront
Successful stock investing is built on a relatively short set of fundamental principles.
Once you learn and understand the basics, you can continue investing with minimal maintenance and time to keep the system working for you.
While you are working on building your financial literacy around investing, you can still get started with some done for you options.
Many plans available through your job will offer target date funds that contain the right mix of stocks for someone wanting to retire in a particular year.
Then, you pick the fund closest to that year. Done.
Conversely, it can easily take 6 months to a 1 year to learn the different parts and pieces of investing in real estate to the point that it is less high risk.
Any investment carries an inherent amount of risk. You have moved past just keeping moving in your savings account. When you invest in stocks, you are buying shares of a company and along for the ride whether do well or poorly.
However, you can greatly mitigate against that risk if you properly diversify your investment choices. This means picking the right mix of stocks so that you don’t have all of your eggs in one basket.
No one wants another Enron situation…
Low capital needed to get started
This is one of the biggest benefits.
Please don’t think that you have too little money to get started.
You can purchase an individual stock or buy into a fund with a low initial contribution. The exact amount you need to start varies by company or brokerage, but you can dip your toe into the investing waters with as little as $25 per paycheck.
Automated investment options
Last but not least is automation.
Wouldn’t you want to minimize the amount of time you have to spend in managing these investment accounts?
I’m sure you’ve heard great hoopla about earning passive income. This is possible with stock investing as well.
Once you have decided which stocks you want to purchase, you can set up an automatic contribution so that you continually purchase the same stocks at the frequency that works for you.
At the end of the day, investing in real estate is also a great way to put your money to work for you but it’s a more complex strategy.
Stocks are the best way to first enter the investing world, especially when you are just getting started.