I didn’t want to blog about investing till much later, but the Straits Times had an interesting article yesterday titled Stocks v Property. It deals with the issue of “Where the hell should I put my money?!” when it comes to investments. Everyone talks about investments, like: “yeaaahhhh I should really save up for a house… but it’s really expensive…” or “yeaaaahhh I’ve been meaning to invest for awhile now, but I don’t think I have enough time/money/interest…whine whine whine”. But very few people actually get off their ass and actually do some real research on what they should be investing in, so they either 1) don’t invest altogether, or 2) make some stupid investment decisions.
So an article like this gets some of that research done for you, which is awesome. I loved the first part of the article, which used numbers and statistics to back a case and destroy some common assumptions that we all have. The article should’ve just stopped right there, but part 2 of it gave some absolutely terrible investment advice, and I just had to say something about it, in a minute.
Some good investment research
From the ST article: “Retail investors, especially those in Singapore, tend to think of stocks as a short- to medium-term investment. When seeking a long-term investment, most Singaporean investors think of property first.
But a recent comparison done by the Singapore Exchange (SGX) has shown that, in fact, local stocks have outperformed private residential property over the long run. In the 10 years from 2001 to 2010, the benchmark Straits Times Index (STI) gave an annualised return on investment of 4.9 per cent. Meanwhile, if you had bought property in 2001 and sold it in 2010, you would have made an annualised return on investment of 3.9 per cent over the period.”
Sure, the study excluded returns from dividends and rents, but add those into the mix and stocks have still historically outperformed real estate over the long run. And while 10 years is hardly considered to be the “long run”, other studies have shown that stocks have outperformed real estate over longer time periods (see this New York Times article).
Some terrible investment advice (esp if you’re young):
So the Straits Times article would have been awesome if it had presented the statistics, drawn a conclusion, and stopped there. But page 2 of the article had some terrible investment advice:
“Mr Vasu Menon, OCBC Bank’s head of content and research, noted that such wild swings in the stock market are even more prevalent today. As a result, he said, holding on to stocks for the long term is no longer a relevant strategy in this day and age.” (emphasis added).
“So even if stocks had outperformed property between 2001 and 2010, he said, there is no guarantee that they will do the same over the next decade. His advice: Set a target for your stock investments and have the discipline to stick to it. Say, for example, that you hope to make a 30 per cent return on a certain stock within three years. If the stock somehow reaches that 30 per cent target within six months, just sell, Mr Menon said.”
Hello?! Stocks are “no longer a relevant strategy in this day and age” just because the market has been volatile and uncertain? Mr Menon obviously needs a lesson in economic history: volatility and uncertainty are NOTHING NEW to the stock market. They’ve always been there – the Great Depression from 1929, the 1940s when stocks pretty much didn’t go anywhere, the “Black Monday” of 1987, the dot-com bubble of 2000, the collapse of Lehman in 2008… and yet the US market has averaged a whopping 9.96% annually from 1920 to 2010. Volatility and uncertainty aren’t “unusual”, they’ve been characteristic of the stock market for the past 200 years. And anyone hoping to benefit from the long-run return of the stock market would have to learn to deal with these characteristics.
Next – Mr Menon is advocating that you cut your gains short by selling as soon as your stocks make a certain amount of profit. Sure, that might prevent your portfolio from turning into a loss, but it also prevents you from ever getting rich if the stock market does take off, leaving you sitting by the sidelines and whining like a baby. If you’re a young investor with a steady income and many years of investing ahead, then Mr Menon’s advice is absolutely terrible for you. He’s right that there is no guarantee stock prices will rise over the next decade – there are no guarantees when it comes to investments (unless you consider Ponzi schemes to be “investments”) – but over a long enough time period, there’s a pretty damn high likelihood that the stock market will come out on top.
So what the hell should you do?
Let’s be clear – your job isn’t to make sure that your portfolio makes money over the next 6 months, 1 year, or 3 years. Your job right now is to ACCUMULATE as many assets as you can. Since we know that stocks are ultimately likely to give you the best return over the long run, your job is to make sure that you have as many of those assets as possible, so that your returns will be multiplied across all those assets after a long, healthy period of investing! We’re talking 10, 20, 30 years here. Who cares if volatility wrecks havoc to your portfolio over the short run – it doesn’t make a difference because you’re not thinking of selling within the next couple of years anyway. Ignore the day-to-day fluctuations, ignore the uncertainty and fear that pervade the news, and ignore the stupid, complicated investment advice out there. Investing can be simple, straightforward, and best of all, automated (I’ll be blogging about that in time to come). Stick to your guns and accumulate as many stocks as possible, and you’ll be rewarded in the end.
To me, the answer is pretty clear: multiple studies, research and 200 years of stock market history have shown that the stock market is more likely to give you a better return over the long-term. Do I think that property is a bad investment? Of course not. The best portfolio would consist of both stocks AND real estate, among other asset classes. There’s way too much to say on this topic, so I’ll be blogging more about it as we go along. But I thought I’d start us off with a little taste of it here. 🙂