According to the Federal Reserve, of the 10 percent of families with the highest income, 92 percent owned stock as of 2020, just above where it had been in 2007. But ownership slipped for people in the bottom half of the income distribution, and to a lesser degree for people who were above the median but below the top 10 percent.
As of 2020, the top 10 percent of Americans owned an average of $969,000 in stocks. The next 40 percent owned $132,000 on average. For the bottom half of families, it was just under $54,000.
We’ve seen a massive rise in the S&P 500 since 2009, meaning that serious wealth has been made by the wealthiest of Americans. What’s even more astounding is that the top 1 percent of households by wealth owned nearly 38 percent of all stocks shares according to research by NYU economist Edward Wolff.
Surprisingly though, stock ownership has fallen to only around 52% overall since the financial crisis. This is shocking and unfortunate since the S&P 500 has been marching to new record highs each year. Check out the latest data below. This is the latest data we have for early 2020.
So what does this all mean? The wealth gap continues to increase. Those families in the 90th percentile have a net worth of almost $1,000,000. Meanwhile, those in the 50th percentile or below hardly have any net worth at all.
Why You May Want To Own Stocks Over Real Estate
1) Higher rate of return. Stocks have historically returned ~8-10% a year compared to 2-4% for real estate over the past 60 years. You can also go on margin to boost your returns, however, I don’t recommend this strategy given your brokerage account will force you to liquidate holdings to come up with cash when things go the other way. Your bank can’t force you to come up with cash or move out so long as you are paying your mortgage.
2) Much more liquid. If you don’t like a stock or need immediate cash, you can easily sell your stock holdings. If you need to cash out of real estate you could potentially take out a home equity line of credit, but it’s costly and takes at least a month.
3) Lower transaction costs. Online transaction costs are under $10 a trade no matter how much you have to buy or sell. The real estate industry is still an oligopoly which still fixes commissions at a ridiculously high level of 5-6%. You would think the invention of Zillow would lower transaction costs, but unfortunately they’ve done very little to help lower expenses. They are in cahoots with the National Association of Realtors because they are their source of advertising revenue.
4) Less work. Real estate takes constant managing due to maintenance, conflicts with neighbors, and tenant rotation. Stocks can literally be left alone forever and pay out dividends to investors. Without maintenance you’re able to focus your attention elsewhere such as spending time with family, your business, or traveling the world. You can easily pay a mutual fund manager 0.5% a year to pick stocks for you or hire a financial advisor at 1% a year. Or you can just manage your portfolio yourself due to so many free financial tools online.
5) More variety. Unless you are super rich, you can’t own properties in Honolulu, San Francisco, Rio, Amsterdam and all the other great cities of the world. With stocks you can not only invest in different countries, you can also invest in various sectors. A well diversified stock portfolio could very well be less volatile than a property portfolio.
6) Invest in what you use. One of the most fun aspects about the stock market is that you can invest in what you use. Let’s say you are a huge fan of Apple products, McDonald’s cheeseburgers, and Lululemon yoga pants. You can simply buy AAPL, MCD, and LULU. It’s a great feeling to not only use the products you invest in, but make money off your investments.
7) Tax benefits. Long term capital gains and dividend income are taxed at lower rates (15% and 20%) than the top four W2 income rates (28%, 33%, 35%, 39.6%). If you can build your financial nut large enough so that the majority of your income comes from dividends, you could lower your marginal tax rate by as much as 20% or so, depending on the current legislation.
8) Hedging is easier. You can protect your real estate investments through insurance. If disaster strikes, it’s often a pain to get your insurance company to pay for damages because the burden is on you to prove your claim. With stocks, you can easily short stocks or buy inverse ETFs to protect your portfolio from downside risk.
9) Potentially less ongoing taxes and fees. Holding property requires paying property taxes usually equal to 1-3% of the value of the property each year. Then there’s maintenance costs, insurance costs, and property management costs. You can build your own portfolio of individual stocks and bonds for just $5 a trade.
Or you can have a digital wealth advisor like Betterment build and maintain your investment portfolio for just 0.25% a year in assets under management after the first $15,000. They use their research and algorithms based off modern portfolio theory to best manage your money based off your inputted risk tolerance.
Characteristics Most Suitable For Real Estate Or Stocks
Real Estate
* Believe wealth is made up of real assets not paper.
* Know where you want to live for at least five years.
* Do not do well in volatile environments.
* Easily spooked by downturns.
* Tend to buy and sell too often. High transaction costs ironically keep you from trading too often.
* Enjoy interacting with people.
* Takes pride in ownership.
* Likes to feel more in control.
Stocks
* Happy to give up control to those who should know better.
* Can stomach volatility.
* Have tremendous discipline not to chase rallies and sell when things are imploding.
* Likes to trade.
* Enjoy studying economics, politics, and researching stocks.
* Don’t want to be tied down.
* Have a limited amount of capital to invest.
The Key Is To Invest For The Long Term
Whatever you do, don’t own nothing. Inflation will rob you of your financial happiness when you are older and less willing or able to work. Own assets that rise with inflation. Even though the stock market went into bear market territory in 2020, all the more reason to buy stocks for the future.
Real Estate Is Attractive Too
This article has discussed a lot about the benefits of owning stocks. However, real estate is actually my favorite asset class to build wealth, and also America’s favorite asset class as well.
Unlike stocks, real estate is a tangible asset that provides shelter and has a more stable income stream. Further, real estate’s value is much less volatile during difficult times. Not only should every get neutral real estate by owning their primary asset, they should also get long real estate by investing in rental properties and commercial real estate.
My favorite way to invest in commercial real state and real estate across lower cost areas of the country is through Fundrise and CrowdStreet, my two favorite real estate platforms.
Fundrise is great because you can invest as little as $500 in one of its diversified eREITs that gives you broad based real estate exposure with low volatility across regions of America.
CrowdStreet is great because it allows you to invest surgically in 18-hour city real estate where valuations are much lower and growth rates are higher due to demographic shifts. With the work from home trend accelerating in 2020, telework has never been easier or more acceptable.
Both platforms are free to sign up and explore. I’ve personally invested $810,000 in real estate crowdfunding to diversify my investments and earn more passive income now that I’m a father of two little ones.
Invest in stocks and real estate. 10 years from now you’ll be happy you invested today.
Stay On Top Of Your Finances
best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize.
Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. I can also see how much I’m spending every month.
The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying!
They also have the best Retirement Planning Calculator around, using your real data to run thousands of algorithms to see what your probability is for retirement success. Once you register, simply click the Advisor Tolls and Investing tab on the top right and then click Retirement Planner. There’s no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Don’t gamble with your financial future.
About the Author: Sam worked in investing banking at Goldman Sachs and Credit Suisse for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends time playing tennis, taking care of his family, and writing online to help others achieve financial freedom too.
FinancialSamurai.com was started in 2009 and is one of the most trusted personal finance sites today with over 1.5 million pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, Bloomberg and The Wall Street Journal.
