It shouldn’t surprise anyone that I read a lot of financial websites and blogs. For some reason it seems that I’ve recently read multiple times about the comparison between stock market and real estate investments. More specifically, what I’ve read is usually something similar to the following statement:

Over long periods of time stock market returns outperform real estate returns.

The supporting data used to support such a claim is usually something like saying that the stock market averages around 8% while real estate only averages 3 or 4 percent (or pick your own numbers based on some past time period). On the surface, this seems like a pretty cut and dry conclusion, one that one person will say “it’s proven that a diversified portfolio generally beats real estate investments”. I can’t say that I agree with this statement, and wouldn’t say that it’s been “proven”, especially if it’s only “generally”.

This aside though, I don’t understand how one can think stock market investments will outperform real estate, especially diversified stock market investments, which usually means index funds or mutual funds. When these people think of real estate investments, they must only be concerned with the actual appreciation of the full value of the property. In this case, stock market returns may be higher. But I believe that most people would be and should be concerned with their actual returns.

When looking at real estate investments, the more important measure of your returns is better viewed as a percentage of the actual amount invested. For instance, if you put 20% down on a $100k property, then your actual cash outlay is $20k. If the property increases in value only 4%, it’s now worth $104k. This four thousand dollar increase is then a 20% return on your initial investment which is much better than what most people will attribute to real estate. You just can’t forget the effect of leverage on your investments.

And I haven’t even mentioned the benefits of the cash flow properties can produce and what’s known as Cash on Cash return. I’ll leave this for another post though. I just wanted to put my thoughts out there on this subject since I keep hearing that broad index funds and the like are supposedly so much better than real estate. Such a blanket statement just can’t be true.

Last week I finally got around to making another deposit into my Roth IRA to max out the contributions for this year. It’s been a while since I’ve talked about this account, so you may want to read The Roth IRA Re-visited, Starting my Roth IRA, and the Best of the Roth IRA if you haven’t already. Here’s a brief overview though if you’re to lazy to read the other posts:

• There are no tax benefits in the current year, but the earnings and gains are tax free.
• Withdrawals can be made after age 59 1/2
• Your contributions can be withdrawn without penalty at any time (they were after tax remember)

Now for what I do with my Roth IRA. Unlike many personal finance writers, I don’t opt for the frequent contributions to broad market index funds. I’ve heard all of the arguments for them, and will admit that they’re a great fit for many people. I don’t want to dissuade anyone from using them if that’s what you want to do. I’m just not into them.

I, on the other hand, prefer to buy individual stocks and assemble my own “mutual fund” if you will. I don’t buy and sell very often at all, and I’m definitely not what you would call a day trader. I mostly just buy actually and I very rarely sell. Currently I’m working on assembling a very solid base of large cap stocks with steady dividends. After this foundation is established I will then probably branch out into other areas.

If you read the other posts earlier, you’d know that I have my Roth IRA through Scottrade and they charge $7 per trade. I typically buy in $1K increments which is enough to keep me from making rash decisions and keeps the expense ratio pretty low. This doesn’t provide instant diversification, but over time it does and will.

As for my most recent contributions I’ve already made one purchase and am looking to make another. I decided to add to my position in Bank of America (BAC) since the stock has been hammered lately along with the entire financial sector. I’m pretty sure that they’re not going anywhere anytime soon and that they will still be a good company in the future. It also helps that because of the recent sell-off the dividend yield is up over 6 percent.

Like I mentioned before I’m still looking for one more purchase, and I’ve had my eye on a couple of different companies. I was interested in Jack in the Box (JBX) over a year ago and they have since doubled. I’m still interested, but I’m not sure they’re worth quite as much as what they’re currently trading for. I would also like to own McDonald’s (MCD) but they’re also pretty expensive with a P/E ratio of about 41.

I’d like to hear from you though. If you were looking to purchase a stock right now, which one would it be? What would your reasoning be? Hopefully I’ll be able to learn something…

I’d also like to give a mention to two new commenters here at Fiscal Musings:

• David at Marketing Deviant and
• Racer X over at Life, Liberty and the Pursuit of Money

When you start to invest or begin looking at your different options of what to invest in, it is paramount that you understand what you’re investing in. This concept applies to many aspects of our lives, but here I’m focusing on investing. You’ve got to understand what you’re doing.

There are so many options available to us these days that it can be extremely tough to choose where to put your money. There are full service brokerages, self service brokerages, retirement accounts (both employer sponsored and not), mutual funds, individual stocks, real estate (residential, commercial, etc.) and so much more. If you understand how money is made in each of these investments you can do quite well for yourself. If, however, you’re not sure how they work, you can also lose a lot of money.

I’m sure most all of you have seen those late night infomercials telling you how easy it is to make money in something like real estate. And I’m sure there are all sorts of opinions on this subject as well. Well, the truth is that there is both money to be made in real estate and money to be lost. Donald Trump is a typical example of someone who knows how to make money in real estate and you probably know someone who has lost money in real estate. The difference, I submit, is that some understand the game and others don’t.

The stock market is another place where some people make money and others lose money. There are people like Warren Buffett and (once again) there are plenty of others who have lost a ton of money in the market. I don’t think anyone will dispute that Warren Buffett understands how the market works and how to profit from it. Those who continually lose money in the market probably don’t understand it like they should.

So what does all of this mean for us? What should we invest in and how? It may behoove us to step back and instead of wondering what to invest in, decide what we understand or what we want to understand better. If you’re interested in the stock market, begin by researching how one makes money in it. Just because you’ve heard that you can make a lot of money through options trading doesn’t mean that you know how to. Someone you know may have made some money by shorting a stock. Does this mean that you should all of a sudden start shorting stocks?

Now, instead of realizing all of the things that you don’t understand, take the time time to educate yourself in areas of investing that interest you. Perhaps you can find a mentor of sorts that knows how to do what you want to do. There are also a ton of books at the local library with a wealth of information on various investing topics. It may be time to invest a little time in yourself before you start investing your money.

1. The social networking site Facebook is pulling its ad campaign. Apparently Facebook is able to track your online purchases and would then post them in your profile. Users were complaining because they didn’t want everyone knowing what it was they were purchasing, especially as we enter the holiday season. It probably wasn’t the best idea, but I don’t think that it’ll be the end of Facebook.

2. Are you among the thousands of consumers that are looking for a Wii? You’re definitely not alone in this one; Nintendo is again having trouble keeping up with the intense demand. It seems that they’ve tapped a consumer base far larger than the usual gaming circles. I wouldn’t be so concerned about this, but I’m looking for one as well. My parents want to get me one for Christmas, and they’ve enlisted my help to try and find one.

3. MoneyNing discusses what individual investors should do with all of the current fear in the market. He recognizes the different types of investors and comments on each kind. An interesting read for any investor.

4. Fiscal Musings Throwback (FMT): Too often, people worry about what percentage of their income to save or invest. And instead of saving something to begin with you wait until you figure out what percentage is the “best”. It’s an interesting phenomenon, but I’ll let you just read the article.

This is a guest post from The Rogue League.

There are many ways to invest your money. To me, the stock market has always been the most interesting. I offer a few of my thoughts on investing in stocks here. And since I like fantasy baseball, I’ll offer examples of how these principles would apply in that realm. Note that I’m not actually offering investment advice here, and it’s important to remember that these are general principles– certain situations may require specific actions that go contrary to conventional wisdom.

1) Be Interested - this means to educate yourself on some general economic principles. It means to keep a level of interest in your investments sufficient that you will be aware of all the market forces that can affect it. Ideally, it would be in a company that you are naturally interested in, or perhaps already purchase products from. In terms of fantasy baseball, you have to be aware of what all is going on in major league baseball, enough so that you can make roster moves as needed.

2) Practice Patience - a good stock is a good stock. Hopefully you were able to buy it at a bargain. But perhaps it’s not doing so well right now. In terms of fantasy baseball, if you have Alex Rodriguez on your team, and he hits only .220 in April, would you drop him? You’re not a fool, are you? You keep him, because you know he’ll come around and get you good stats. If you have a good stock, but it’s struggling a bit, give it some time. That’s not to say there aren’t instances where the stock is tanking, and really you just need to get out and cut your losses. Many times, however, people panic prematurely. If you can avoid being one of those guys, you can profit off of them.

3) Embrace Change - sometimes one stock opportunity will have dried up when another is presenting itself. Don’t be afraid to re-evaluate your portfolio and make changes. Indeed, change is a constant in our economy. Our ancestors in the 1920’s could not have dreamed of the internet. However, today’s latest technology will be obsolete tomorrow as new products come to market. How we respond to change is the key. This may seem contrary to #2, but really what it’s saying is, once you’ve made the determination that you’ve been sufficiently patient, now, adapt to the differences. In fantasy baseball terms, once you’ve finally come to the realization that Mike Mussina is simply not, and no longer will be, the player he once was, don’t be afraid to drop him and grab a promising rookie off the waiver wire.

In addition to getting out of debt, being frugal, and saving for retirement, you would be wise to look into various forms of alternative income. If you think about it, looking ahead towards retirement you’re going to need another form of income other than your job. Most people hope to have enough money saved in their retirement accounts that they can live comfortably off of the interest or other investment income. So the question then becomes… Why wait until retirement to develop these income streams?

In fact, the sooner you create this alternative income, the sooner you will have reached financial freedom. Once your alternative income streams are greater than your expenses, you have the freedom to do whatever you’d like. You can continue to work, quit altogether, or find some happy medium in between. The point of all this is that you don’t have to wait until age 65 to make this happen.

There are many different forms of alternative income, and you’ll need to find what you’re most comfortable with. If you put your money into a money market account, you can view the interest earned as passive income. You might decide to purchase stocks that pay nice dividends. These dividends may serve to replace some of your current job income. One of my personal favorites would be real estate investment income. Here you may have an income producing rental property that gives you a hundred or so dollars a month or even more.

You may not want to put all of your money into income producing investments, but you’d be wise not to ignore them. It’s not bad to play the asset appreciation game, but there’s a whole other playing field with cash flow. Also, the more you look into this type of investing, the more opportunities you’ll find to increase your financial position.

By now you’re probably aware of the extreme market downturn that has occurred over the last couple of days. I’m sure a lot of people have lost quite a bit of money. Many people are selling and you’ll probably also hear a lot people say that it’s another great time to buy. Whatever you want to do you can probably find compelling reasons to do it.

You might want to implement the dollar cost averaging strategy however. It’s a way to make sure that you’re taking advantage of the buying opportunities offered by a down market and buying less in an up market. However you decide to handle the current market situation, try not to let your emotions (especially fear) get the best of you. When you invest you incur a certain amount of risk and you’ve got to be able to handle situations like this.

I would suggest that you look to see if there are any bargains in market though. Everytime there’s a downturn like this people sell things that they normally wouldn’t sell. They just follow the crowd. You may be able to find some great companies for sale at an attractive price.