When you mention investments, many people automatically think of stocks. Yet the stock market merely scratches the surface when it comes to the variety of options people have when they choose where to invest their money. Real estate has become an increasingly popular alternative investment for people who seek to diversify their portfolios. As we look at real estate vs. stocks, you’ll see how these two very different investments can impact an investor’s portfolio.

Risk vs. Returns

For a recent report titled The Rate of Return on Everything, 1870-2015, researchers examined 16 economies over a period of 145 years and compared their returns on equities, residential real estate, short-term treasury bills, and longer-term treasury bonds. Upon analysis, the data made a clear determination: residential real estate had the best returns.

Real estate is generally considered to be a low risk, high return investment due to its very nature: land is a fixed resources and in high demand thanks to a growing population.

Individual stocks, on the other hand, vary significantly when it comes to risk vs. return, though many fall into the categories of either low risk/low return or high risk/high return. The result is that many investors are pigeonholed into either of these paths based on a number of other factors.

Liquidity

Stocks can be purchased, traded, and sold in mere seconds. While there are penalties and tax considerations to be aware of, most stocks are considered liquid, meaning you could sell a portion of your stock portfolio in case of emergency or perhaps to make a payment on your child’s college tuition.

Real estate, on the other hand, is considered an fairly illiquid investment. Geo-specific market performance and other factors can have a huge impact on one’s ability to acquire or sell private equity real estate in a timely manner. Plus, it often takes years to realize the investment’s true profit potential.

Time Horizon

There has been a recent shift in the ideologies surrounding how people manage their portfolios. Thanks to data that uncovers the risks of attempting to time the market and make predictions based on flimsy “indicators,” more sophisticated investors are choosing a long-term, goal-based investment approach. These investors are then freed from the day-to-day dips and falls of the stock market and have time to focus on achieving specific goals.

Real estate is a wonderful long-term investment, as appreciation and ongoing rental income become more profitable over time. While stocks can help investors achieve short-term goals, most financial professionals advise against using them in this way. Instead, as with real estate, stocks are a good long-term investment.

Exclusivity

When it comes to stocks, there are few barriers to entry. These days, pretty much anyone can own a slice of Disney, Campbell’s Soup, or General Electric. People can even purchase penny stocks! While some people take pride in funding specific companies for which they feel a personal affinity, when you consider the fact that there are millions of people with that same tiny piece of ownership, most investors are merely a drop in the bucket.

Traditionally, real estate investments boasted an extremely high barrier to entry, namely the high costs of purchasing private equity. These days, however, many businesses are trying to make the cost of investing in real estate less prohibitive, which allows more people to take advantage of this profitable investment.

Still, real estate remains exclusive in a number of ways. For instance, there are only so many beaches, and therefore only a fixed number of beach properties. The unique, inelastic nature of real estate often offers people a certain level of pride and autonomy in their investment.

Real Estate vs. Stocks: Which Belongs in Your Portfolio?

While you should always consult with your financial advisor when making changes to your portfolio, this question is a bit tricky, as the answer is almost always both. Experts on both ends of the spectrum agree that the most successful investment portfolios are diversified. So while most portfolios would benefit from a mix of traditional stocks and private equity real estate investments, your particular exposure to each of these investments will vary based on your unique goals.

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