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It's generally less risky to sink your savings into stocks vs. real estate. But the end game ultimately hinges on building a globally diversified, risk-appropriate portfolio.

Are millennials avoiding investing because they perceive stocks as a gamble?

Maybe. An Ontario Securities Commission (OSC) study found that Canadian millennials see investing as “riskier,” with 57% saying they don’t invest because they are worried about losing money in the financial markets. Case in point: while 80% of millennials say they are saving money, only one in two are investing.

What’s up with that? Some experts argue that millennials are the most fiscally conservative generation since the Great Depression, holding larger percentages of their savings in cash and taking a more pessimistic view of investing than earlier generations.

It’s also because many millennials are jonesing to buy houses. In that same study, 68% of millennials who don’t invest said they have “other financial priorities,” with homeownership being a top goal. Indeed, a home may seem like a safer investment, especially with stories swirling about investors losing their life savings on one bad stock.

But it begs the question: are stocks riskier than real estate? Or is it just “fake news?”

Risk is relative

Here’s the short story: stocks are not necessarily riskier than real estate. But we need to provide some context to the term “risk.”

If your definition of investing means putting money into meme stocks you heard about on the Reddit forum r/wallstreetbets, then yes – stocks are riskier than real estate.

But that’s not what we’re talking about. A smart investor builds a globally diversified, risk-appropriate portfolio of stocks and bonds. That’s certainly less risky than buying a single home located in a single neighbourhood in a single city in a single country.

A globally diversified portfolio could hold upwards of 12,000 or more stocks, so you’re not relying on any one stock, sector, or geographic region to perform well for your money to grow.

Stocks vs. real estate: which has the better returns?

Historically, stocks tend to increase in value more quickly than real estate, as well as produce higher than average annual returns. Case in point: the S&P 500 index representing the largest 500 companies in the United States has historically delivered total returns in the 9% to 10% range. Likewise, the Canadian stock market provided an average annual return of approximately 10% from 1970 through 2015. Meanwhile, Canadian real estate prices have only increased by about 5.35% per year over 10 years (ending December 31, 2019).

Of course, there are nuances to consider. When it comes to returns, data on housing as an investment goes as far back as 1870 and surprisingly, global housing has produced the best long-term returns of any asset class, even over stocks. Housing beat inflation by 7.05% compared to 6.89% for equities.

But here’s the catch: Those housing returns include both capital appreciation (the increase in price over time) and rental income. When you look at the capital appreciation alone, housing has only beaten inflation by a modest 1.72% (versus stocks beating inflation by 6.89%).

Real estate investors aren’t diversifying globally. In fact, they’re usually concentrated in a single property in a single city. And homeowners generally budget at least 1% of a home’s value each year for ongoing maintenance and improvement. When you subtract that cost from your home’s appreciation, along with any mortgage interest that you’re paying, it can really eat into your so-called returns. That’s not something you have to worry about with stocks.

The bottom line? When you dig deep into the data and consider “holding” costs associated with homeowners, investing in stocks is more likely to lead to better long-term outcomes on a risk-adjusted basis.

Perception is everything

Furthermore, there are all kinds of psychology at work here, like FOMO, loss aversion, plus generational narratives about stocks and real estate that frame a story in your mind.

It’s easy to fall into the mindset that real estate is the better investment. The financial media reports obsessively about the red-hot real estate market and Boomers flex their massive housing gains on both their primary and vacation homes. You’ve probably heard from a Boomer say that “renting is a waste” and homeownership is “the best investment you can ever make.” Buying a home is also seen as a rite of passage into adulthood. Finally, real estate is also tangible and easier to understand, which may make it feel safer.

Meanwhile, the stock market is something very few millennials are comfortable with or even know anything about. Whether it’s a fear of losing money or that they don’t trust banks or investment firms, it’s clear that young Canadians would rather put their savings towards real estate instead of stocks. In the OSC study, 59% of millennials who don’t invest said they don’t understand enough about investing to get started. (PS – if that’s you, here’s how you can get started investing)

“Market anxiety” is also understandable. The stock market is priced daily, so it’s easy to see when prices fall. There are also numerous channels and newspaper columns dedicated to the daily movements of the stock market. It’s not uncommon to see large red downward pointing arrows next to bold headlines proclaiming the “worst day ever” for stocks.

The same can’t be said of the housing market. You’ll likely have no idea what your house is worth until you put a “For Sale” sign on the lawn. Pricing of comparable houses is kept under wraps by the real estate industry – although they do release monthly ‘average’ data of housing sales and prices.

Can stocks really beat the hot Canadian real estate market?

At face value, the current red hot Canadian real estate market may seem to “beat out” stocks. In March 2021, the average sale price of a home in Canada was 31.6% higher than it was one year earlier. And Canadian housing market prices are projected to increase by 5% in the remaining months of 2021. Can a stock portfolio really compete with these record-breaking prices?

Investing in Canadian real estate, particularly in Toronto and Vancouver, has clearly been a wise decision over the past 10-12 years. If we had a time machine and could go back to 2010, we would be foolish not to buy a home in one of those Canadian cities.

But investors must make decisions today with future expected returns in mind, and those are unknowable in advance. What we do know is that Canadian real estate is expensive by historical measures. The same could be said for stocks, particularly in the United States.

My feeling is that investors need to lower their return expectations for both asset classes. Stocks and housing can’t continue soaring forever without some reversion to the mean.

That said, a stock investor can easily diversify globally with a single all-in-one ETF and that type of diversification can offer better long-term returns than a concentrated portfolio (like a single property). If Canadian real estate crashes, corrects or flattens over the next decade then you’d be glad to hold a globally diversified basket of stocks.

Can’t afford to buy a house? Where to invest instead

Housing prices are at an all-time high and any type of property is now unaffordable for many Canadians who don’t own homes. So if you’ve got cash sitting on the sidelines, what should you do? Here are a few options for safe investments in Canada.

Rent and redirect your funds

For starters, you could rent instead of buying a home and invest the extra cash instead.

Let’s get one thing straight. Renting is still a sensible option for young Canadians who live in expensive cities like Toronto or Vancouver. Instead of saving up for a pricey condo or detached home, you could invest that money plus any extra cash flow from renting into a globally diversified ETF portfolio. There are indeed plenty of wealthy renters who have chosen to forego homeownership and instead build a sizable retirement portfolio.

Beef up your TFSA and RRSP

Canadians have two terrific tax-advantaged accounts to tap into: RRSPs and TFSAs. Use both, as appropriate, to save and invest for retirement.

With an RRSP contribution, you can potentially earn a juicy tax refund and then turn around and put that money into a TFSA, killing two birds with one stone.

READ MORE: TFSA vs. RRSP

Invest in an All-in-One ETF

When it comes to stock market fears, I get that investing can be intimidating. But it has never been easier to invest on your own using a single all-in-one ETF at an online broker.

These products remove the scary stigma from the stock market and allow you to build an incredibly diversified portfolio without having to do much more than add new money regularly.

Every major ETF provider offers a suite of all-in-one ETFs, ranging from conservative to balanced to growth – there’s something for every type of investor.

Big names like Vanguard, iShares, BMO, TD, Horizons, and Fidelity all offer these products. Pick one that suits you, contribute regularly, and you’ll be well on your way to a prosperous retirement.

Invest in a REIT

Got real estate fever but lack capital? You could put your money into a Real Estate Investment Trust (REIT) – companies that own and sell shares in income-generating real estate. With a REIT, you can invest in all kinds of real estate properties: from office buildings to shopping centres to residential buildings.  Plus, you only need a few hundred bucks to get started investing in a REIT, whereas you’ll need a substantial downpayment to purchase a property.

There are many types of REITs, but a solid option is to invest in a REIT exchange-traded fund – a basket of REITs traded on the stock exchange. It’s an easy way to create a balanced, diversified investment portfolio with real estate holdings, and it helps protect your portfolio from stock market volatility through diversification. You’re putting your money into the entire real estate market rather than one company.

The bottom line

If you’ve decided to forgo homeownership and focus on building up your investment portfolio, it’s a smart move.

I get the desire to own a home. I own one myself. But your home is not an investment. Believe me. Homeowners have unrecoverable costs like property taxes and house insurance, not to mention an ever-rising maintenance bill.

Buy a home when you’re financially ready. When you’ve put down roots and can reasonably stay in that home for at least 10 years.

Meanwhile, don’t be afraid to put your additional savings and cash flow into a well-diversified portfolio of stocks and bonds. Stocks have been the top-performing asset class and should continue to be for the foreseeable future. Yes, the ride can be roller-coaster-like in terms of ups and downs. But the long-term trajectory points up and will lead to a positive outcome if you stay on board.

Evidence-Based Guide to Successful Investing