When Bankrate asked more than 1,000 Americans where they would prefer to invest money—long-term funds that they don’t need for another decade—the response was surprising. Slightly more than thirty percent said they would invest in real estate.
For young people, this preference is especially true. Among millennials (those ages 23 to 38), 36% responded that real estate is the best long-term investment option. Zero-risk cash investments, such as high-yield savings accounts or CDs, was second with 18% of respondents, and the stock market was third, with 16% of respondents.
CNBC reports in its recent article “Millennials agree on the best way to invest—but they’re wrong” that not only do millennials have the biggest preference for real estate of any generation, they’re also the least likely to invest money into stocks. This group has never been attracted to the stock market despite the 10-year long bull market. One reason may be because they favor more concrete investments, and their preference for real estate shows the desire many ultimately have for homeownership. The tangible nature of real estate gives them more comfort than what may seem more abstract, such as stock ownership via mutual funds and ETFs.
However, real estate isn’t always the best or simplest way to build wealth, especially for those who just own single-family homes.
While there are lots of reasons to buy a home, it’s no replacement for a retirement fund. It is usually a terrible investment. Just ask anyone who lived through a real estate bubble!
Homeownership has many expenses, such as property taxes, maintenance and homeowner’s insurance. Although a home may increase in value over time, it probably won’t appreciate enough to offset all the money spent on expenses over the years.
An investor can generally assume that, over the long term, funds invested in a low-cost diversified index fund will realize a roughly 7% annualized return.
Even with the ups and downs in the market, stocks are typically a reliable long-term investment. The S&P 500 earns an average annual return of about 10%. Adjusted for inflation, this is still an annual return of 7% to 8%. In addition, investing in the market doesn’t have to be complicated. A simple way to get going, is by contributing to a tax-advantaged retirement account, like an employer-sponsored 401(k) plan, Roth IRA or traditional IRA.
If there is only one important message to convey to millennials, it’s this: start saving and investing as much as you can, as early in your career as you can. The younger you start, the longer you have to save, the longer your money has to grow and the more options you will have as you go through life’s ups and downs.
Whatever path you choose, it’s critical to begin saving and investing as much as you can as early as you can. The more time your money has to grow, the better the result.
Reference: CNBC (July 18, 21019) “Millennials agree on the best way to invest—but they’re wrong”