Author Topic: Real Estate vs Stocks, Bonds, Commodities, Cash  (Read 335 times)

Imanuels

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Real Estate vs Stocks, Bonds, Commodities, Cash
« on: March 16, 2019, 09:10:13 AM »
Hi everyone.

I've been destructively stuck with important financial decisions recently and would like to ask for advice.

1. Description of the situation.
I'm 31, married, no kids, live in Germany. Working full time (science&engineering) and enjoining great mustachian lifestyle - going everywhere (work, groceries etc.) by bike, making stuff by myself, intentional buying of things that add value, happiness, efficient, minimalist lifestyle. Consequently, I do not manage to spend more than approx. 35% of my income.

2. Description of the problem.
I love what I'm doing professionally and get so much consumed by all kinds of other creative projects that as a result have been utterly ignorant about finances. Thus, my savings have been simply piling up in my bank account all these years. Meaning, they have actually been part by part eaten up by inflation + haven't generated any interest, return of investment. Which I now find really annoying and ignorant from my 'past me'.

3. The question.
I would like to finally put my savings to work with a know that (i) they will not be lost (no gambling, stock picking), (ii) they will generate additional income and gradually compound our family closer to financial freedom ("If you don't find a way to make money while you sleep, you will work until you die", to quote Warren Buffet).

But how to rationally solve this problem? Where exactly to invest? I've been doing some research and come to following conclusions:
- For an average person it appears reasonable to invest in an index fund, such as VTSAX and just get back to work, sleep well at night. Here the Simple Path to Wealth by Collins, as well as other great resources have been very helpful.
- My problem with this approach however is the moment in time, economy now. Namely, by reading several pieces about market cycles from people like Ray Dalio or Howard Marks, they seem to anticipate an economic downturn coming. I have also read that no one can time the market, but if this is really true, perhaps putting my savings into stocks is not such a good idea?

Alternatively, I'm considering bonds, commodities or real estate. I was close to buying an apartment (we're renting currently), but reading Why your house is a terrible investment by Collins has changed my view on this. Especially, considering that we might move elsewhere after roughly 3 years.
Commodities seem to be priced relatively low (GSCI), but I have no fundamental reasons to think that they should rise.

So, the hard part is that I can't really understand and calculate the outcomes of all these stock, bond etc. scenarios. It seems rather random and unpredictable to me (I guess because I'm not an investor, economist etc.). Therefore, I'm completely stuck and simply sitting on cash which of course results in a huge opportunity cost.
Any advice on how to proceed here would be highly appreciated!

Many thanks!
« Last Edit: March 16, 2019, 09:31:16 AM by Imanuels »

davisgang90

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Re: Real Estate vs Socks, Bonds, Commodities, Cash
« Reply #1 on: March 16, 2019, 09:23:18 AM »
I'm all in for socks!  Or maybe you meant stocks?

Imanuels

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #2 on: March 16, 2019, 09:30:02 AM »
Oops typo.
And for whatever reason the post appeared 3x and I can't remove it.

TomTX

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #3 on: March 16, 2019, 10:06:01 AM »
This has been covered a LOT in this forum. I suggest reading through other threads thoroughly, then come back with specific questions.

Perhaps start with the sticky threads.

MustacheAndaHalf

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #4 on: March 16, 2019, 10:25:34 AM »
You could pick an average mutual fund - even that will beat cash.  A bad mutual fund usually beats cash.

Do you like reading enough to get through "A Random Walk Down Wall Street"?  Any of it's 11 editions should be fine - I'd guess there's probably a copy at a nearby library.  That will get you up to speed, and past most banks (who seek to make a profit, after all).

Imanuels

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #5 on: March 16, 2019, 11:22:46 AM »
Thanks a lot for the advice, I will start with the sticky threads then.
Concerning reading "A Random Walk Down Wall Street". My struggle is that I'm not really interested in trading or investing as such. There are too many other great things I can do with my time, which will create much more value. Generally, I completely agree with what Buffet replied to Tim Ferris when was asked for investment advice for a case quite similar to mine: “I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work…”
The only problem is the timing - based on the opinions mentioned above, S&P 500 doesn't seem to be 'safe'. Maybe that's just a cognitive bias producing fear..

Kalergie

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #6 on: March 16, 2019, 01:03:46 PM »
For Germans, I recommend: https://www.finanzwesir.com/

MustacheAndaHalf

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #7 on: March 17, 2019, 12:26:32 AM »
Okay, in that case there's a very small book called "The Investment Answer" that's only 96 pages.  And it's a smaller book, so even the pages are small.

The problem is that when you invest without confidence, anything can shake your confidence.  When a correction hurts your investments, why should you stay invested?  Even now, you're worried about losing money - as everyone is, but experience and knowledge helps overcome that fear and stay invested.  That's why doing some reading is important.

The U.S. stock market is actually larger than the rest of the world's stock markets, combined.  If you look at a total world ETF like "Vanguard Total World ETF" (VT), you'll see over 50% of it is invested in U.S. stocks.  So avoiding the S&P 500 might not be a good idea.
https://investor.vanguard.com/etf/profile/portfolio/vt

Warren Buffet also says to buy when others are fearful, and avoid buying when others are greedy.  After all the dramatic losses in December, the fear came out... and anyone too scared to invest missed a +12% return so far in 2019.

What if you just take a fraction of your savings, 1/5th or 1/8th... whatever you feel comfortable investing, and invest it.  Maybe half in S&P 500, and half in the rest of the world.  You may lose money this year, but the more time you spend investing, the more the stock market tends to beat bonds and savings accounts.  Pick a fraction of your savings and decide to invest that amount.
« Last Edit: March 17, 2019, 12:28:12 AM by MustacheAndaHalf »

flipboard

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #8 on: March 17, 2019, 01:07:04 AM »
But how to rationally solve this problem? Where exactly to invest? I've been doing some research and come to following conclusions:
- For an average person it appears reasonable to invest in an index fund, such as VTSAX and just get back to work, sleep well at night. Here the Simple Path to Wealth by Collins, as well as other great resources have been very helpful.
- My problem with this approach however is the moment in time, economy now. Namely, by reading several pieces about market cycles from people like Ray Dalio or Howard Marks, they seem to anticipate an economic downturn coming. I have also read that no one can time the market, but if this is really true, perhaps putting my savings into stocks is not such a good idea?

Alternatively, I'm considering bonds, commodities or real estate. I was close to buying an apartment (we're renting currently), but reading Why your house is a terrible investment by Collins has changed my view on this. Especially, considering that we might move elsewhere after roughly 3 years.
Commodities seem to be priced relatively low (GSCI), but I have no fundamental reasons to think that they should rise.
There is no good reason not to go for stocks. Don't forget: even if you put _all_ your money into stocks now, you'll be earning more money in future. So if you go all in and the market goes down, your future incomes lets you buy more cheaply. (Personal recommendation: don't go all in, but start investing more and more as you gain confidence. That worked for me, and within 6 months most of my savings were invested.)

When it comes to advice on what to invest in, you need to be careful on this forum, because most people are very USA-biased. As a European, on the stock side, I'd go for either a total-world index (VWRL/VWRD or equivalent), or 50% US  + 50% rest of world. Depending on age/proximity to retirement you will want bonds too, I'm less knowledgeable on that part because I'm too young to want bonds yet (plus current interest rates where I live are such that you'd want to keep cash instead of bonds).

Imanuels

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Re: Real Estate vs Stocks, Bonds, Commodities, Cash
« Reply #9 on: Today at 03:25:27 PM »
Thanks MustacheAndaHalf, I read the "The Investment Answer". A very brief, but useful book.

I have to say, there's still something I find hard to swallow. Namely:
1. Markets work in cycles. What if Dalio and Marks are right, we are late in the cycle, and this extended bull market comes to an end within say the next 2 years?
2. Previous time (2008), it took about 6 years for S&P500 to recover. Again, if Dalio is right and the next financial crisis 'will be more severe', this could take even longer?

Accordingly, if I put my money into stocks now, and 1., 2 happen, perhaps it takes 10 years afterwards to simply brake even.
It seems to make sense, what am I missing?

In principle what flipboard said sounds better - your future incomes lets you buy more cheaply. Maybe going for dollar-cost averaging would psychologically release some stress for the start.

Okay, in that case there's a very small book called "The Investment Answer" that's only 96 pages.  And it's a smaller book, so even the pages are small.

The problem is that when you invest without confidence, anything can shake your confidence.  When a correction hurts your investments, why should you stay invested?  Even now, you're worried about losing money - as everyone is, but experience and knowledge helps overcome that fear and stay invested.  That's why doing some reading is important.

The U.S. stock market is actually larger than the rest of the world's stock markets, combined.  If you look at a total world ETF like "Vanguard Total World ETF" (VT), you'll see over 50% of it is invested in U.S. stocks.  So avoiding the S&P 500 might not be a good idea.
https://investor.vanguard.com/etf/profile/portfolio/vt

Warren Buffet also says to buy when others are fearful, and avoid buying when others are greedy.  After all the dramatic losses in December, the fear came out... and anyone too scared to invest missed a +12% return so far in 2019.

What if you just take a fraction of your savings, 1/5th or 1/8th... whatever you feel comfortable investing, and invest it.  Maybe half in S&P 500, and half in the rest of the world.  You may lose money this year, but the more time you spend investing, the more the stock market tends to beat bonds and savings accounts.  Pick a fraction of your savings and decide to invest that amount.