Since 2002, Gallup has periodically conducted a poll which asks respondents a variant on the following question:
Which do you think is the best long-term investment?
Poll respondents had a choice between real estate, stocks, savings account / CDs, bonds, or other. Gold was added as a possible choice in 2011.
Here’s how the 2017 results broke down:
Real estate leads the pack with 34% of respondents saying that believed that it would be the best long-term investment. Only 26% of respondents believed that stocks would be the best long-term investment. 18% believed gold would be the best long-term investment, and 18% believed that either short-term CDs, savings account, or bonds would be the best long-term investment.
These numbers have been relatively constant the years, with stocks never getting more than 26% of the vote since the question has been in its current format (including gold as a possible answer choice).
The historical data contradicts the opinions of the majority of respondents in the Gallup poll. While stocks, bonds, and real estate all play important roles in an investor’s portfolio, I believe that the stock market is the single best long-term investment for the majority of investors.
Stocks are a better investment than real estate
While it’s really easy to figure out the returns of the stock market since market prices are so available, getting an accurate estimate of real estate returns is much more difficult.
If you calculated real estate returns simply by changes in home prices, the long-term returns of real estate are dismal. Ben Carlson estimates the long-term returns of real estate to be 3.7% from 1928-2013 using the benchmark Case-Shiller housing price index.
Real estate returns are more than just home price appreciation
However, the Case-Shiller index only takes into account home appreciation, without factoring other things like cash flow and transaction costs. Using home price appreciation from the Case-Shiller index is like measuring stock returns without including the dividends. Real estate can pay out a very large dividend, whether it is the amount of money you save in rent by owning a home, or actual cash flow if you have tenants living in your real estate investment.
When you take into account rental yield, real estate returns end up being very similar to stock returns. In fact, a report by the Federal Reserve Bank of San Francisco entitled “The Rate of Return on Everything” argues that real estate has stock-like returns with lower volatility.
Other factors impacting real estate returns
However, there are many other variables that might influence your real estate returns. The Case-Shiller index assumes that you are paying cash for a home, while many investors use leverage when they buy the home through a mortgage or other forms of financing.
Transaction costs and property taxes are also typically not included in real estate returns. Net rental yield in the Federal Reserve paper took into account home maintenance, insurance, and other costs, but did not include property taxes and transaction costs.
Potentially, a more accurate assessment of the total return of real estate would be the REIT index. When you look at REIT returns and stock market returns using data from Portfolio Visualizer, they approach that of the general stock market, although REITs are more tax-inefficient investments than stocks.
Most investors don’t hold diversified real estate portfolios
All of the numbers we have mentioned above are for an asset class as a whole. It’s easy to purchase the entire stock market at low cost — you just buy index funds. For real estate, on the other hand, the easiest way to get diversified exposure to the asset class is through a REIT.
However, I suspect that when most poll respondents think about real estate investing, they don’t think about buying REITs. They are probably referring to the investment in their own home, or investing in individual properties. This will not produce diversified exposure to the real estate market. Real estate market performance varies wildly between housing markets in different metropolitan areas. You could invest in other parts of the country through turnkey properties or real estate crowdfunding, but this is associated with higher costs that erode your returns.
Stocks are riskier than fixed income, but have better long-term returns
Fixed income asset classes, whether it be bonds, CDs, or savings accounts, are well-known to have lower returns than stocks, but also have lower risk. As such, the stock market does better than fixed income in up markets, and fixed income outperforms stocks in down markets (i.e. bonds don’t go down as much). Fixed income asset classes are not the best long-term investment unless you are incredibly pessimistic about the future of the global economy.
Stocks are better than gold
Gold is one of those asset classes where you either love it or you hate it. I’m in the camp of those who hate it, but based on the Gallup poll, it seems like about 15% of America are gold bugs and love it. As Ben Carlson notes in his analysis of historical gold returns, you can cherry-pick a time period where gold has either outperformed or underperformed the stock market.
Conclusion
I believe that the stock market is the best long-term investment. While most readers of this blog probably agree with this assessment, I’m concerned that a significant segment of the general public is still fearful of the stock market, and this trepidation could be hurting their abilities to get adequate investment returns to meet their retirement goals.
What do you think? What is the best long-term investment — real estate, stocks, gold, savings accounts / CDs, or bonds?
[P.S. If you’re interested in writing a counterpoint guest post arguing that one of the other asset classes in the poll (such as real estate or gold) is the best long-term investment, feel free to contact me by using this form. -WSP]
I have always wondered about people who want to invest in gold or silver. Stocks are so easy. Real estate is so hard.
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Almost 1 in 5 think gold is a great long-term investment? It is speculative, produces no dividend and is costly to store and protect. I wonder if they get that from the gold bullion ads on TV or something?
I don’t see why anyone likes gold. Over the long run it has no value other then speculative. If you view it since 1980 it’s return has been poor. I know selectively choosing a time period… but name another asset class that has. lost money in real dollars over 38 years! I’m with you on stocks only from the risk concentration of real estate. If your lucky it can return above market returns (California anyone?). If you are unlucky you can end up like homeowners in Detroit after 2008. At least diversification and time are likely to allow stocks to recover from such events.
When I was young, lived in a rural, economically depressed environment, and not exposed to a real understanding of the stock market, it seemed more of a casino than an investment.
Time, education, and subsequent decades have taught the lesson you have so well delineated.
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