Real Estate vs Dow Jones: What Performed Better Over the Last 40 Years?
As a conscious investor, you’re probably aware of a couple of developing investment strategies you could use to grow your money. Although there are many opportunities floating around, two have remained particularly popular- real estate and Dow Jones. Not only do they come with promising figures and statistics, but we’ve also seen millionaires and billionaires rise from each of them.
Currently, the Asian-Pacific nations lead the pack of the top real estate investors in the world, with more than 12 of the top 20 richest property moguls hailing from there. In fact, the world’s richest real estate tycoon, Lee Shau-Kee, whose current net worth stands at about $25 billion, comes from China. The United States on the other hand, boasts of the highest number of real estate billionaires, with 33, followed by China and Hong Kong.
The Dow Jones also boasts of its own success stories– Carl Icahn, an American whose current estimated net worth is $23.2 billion, dropped out of medicine school to engage in finance. He’s currently ranked as the richest trader, followed by George Soros, a Hungarian, at $23 billion, and Ray Dalio at $14.4 billion.
Evidently, each of the investment types has its fair share of success stories. So, which one should you pursue to join the league of elite investors and rich moguls? Which one has significantly lower risks than the other? Where do you stand to make more money?
To adequately assess potential risks and opportunities, here is a comprehensive analysis of both types of investments and how they’ve performed over the last 40 years;
To help you comprehend the cycles in the Dow Jones Industrial Average Chart, here is the 2012 McClellan Financial Publications chart which assesses the Dow Jones’ performance with reinvested dividends (total return) over two different periods, with the 1982 and 1942 bottoms aligned. For effectual comparing of the two price series, the chart is prepared in logarithmic scaling as opposed to arithmetic.
This second chart indicates the performance of the DJIA on a larger scale- from 1900-2015.
From the first chart, it’s worth noting that the two price series have patterns that are almost matching, with a couple of small anomalies between them. The 1987 crash for instance, may not have had a 1947 analog, but largely facilitated bringing the price plot back down onto the previous one’s path after a significantly huge DJIA upward excursion before that year’s crash. Similarly, the 2008 big decline was significantly larger than 1968’s, but was subsequently followed by the recovery period in 2009, which essentially dragged the DJIA back to the previous price plot.
Another interesting fact is the 2012 trend, where both price plots are almost overlaying each other on the chart. The total returns on the DJIA between the bottom of 1982 to 2012 match the corresponding returns from the bottom of 1942 to 1972. Since there were different nominal returns, taking the raw index values would generate a different result. If dividends are factored in on the other hand, the ultimate returns would be almost identical.
The market was significantly pushed downward between 1973 and 1974 by the combined efforts of the Watergate scandal and impeachment talks which occurred in 1974, and the Arab Oil Embargo in 1973. Collectively, they triggered and maintained a sharp decline from 1973-1974, despite efforts by the Federal Reserve to respond to the oil embargo price inflation by pushing short term interest rates to over 10%. In fact, this move hurt the market even more than it favored it.
By taking a closer look at the Dow closing numbers of the 31st of December of each ending decade, you’ll be able to further define the trend over the last 4 or so decades:
- On the 31st of December 1970, the Dow closed at 800.36
- On the 31st of December 1980, the Dow closed at 838.74, with an appreciation rate of 4.80% through the preceding decade.
- On the 31st of December 1990, the Dow closed at 2,753.20, marking an appreciation rate of 228% through the preceding decade.
- On the 31st of December 2000, the Dow closed at 11,497.12, marking an appreciation rate of 317% through the preceding decade.
- On the 31st of December 2010, the Dow had gone down to 10,428.05, marking a depreciation rate of 9.30%
Going by these numbers, it’s obvious that the Dow grew at an impressive rate of 1203% between1970 and 2009. Although the biggest growth was through the 80s and 90s, the overall trend was largely impressive, with great returns for investors.
This jparsons chart controls the fact that house sizes in the United States have been changing with time by estimating the market value of the current median priced house over a 40 year period. While the thin lines are representative of the pre-bubble trend, the thick blue one shows the nominal house prices, and the thick red one indicates the “real” prices that have been adjusted for inflation.
The house prices in the US were on a steady rise between 1970 and 2001, then the real estate bubble suddenly started. It was marked by swiftly rising house prices which hit a peak in 2006, a period that saw seasoned real estate investors make killings in the industry.
Here’s another chart, the Vanguard REIT Index Fund Investor Shares Index- which indicates Real Estate Investment Trusts (REITs) performance between 1997 and 2015.
There was a significant decline from the high of 2006 to the bottom of 2009. It consequently drove a lot of investors away from real estate, only to be re-invited by a new bubble that began in 2012. Although the new bubble has affected all the states in the US, it’s particularly predominant in the Western States- including California, where house price appreciation is highest.
Overall, going by the 31st December median house prices, the trend through the decades, from 1970, was:
- On the 31st of December 1970, house price median was $25,200.
- On the 31st of December 1980, the median value rose by 114.29% to close the decade at $54,000.
- On the 31st of December 1990, the median house price had moved by 83.33% to close the decade at $99,000.
- On the 31st of December 2000 however, the appreciation rate had slightly gone down to 31.31%, pushing the house price median to $130,000.
- The average appreciation rate slightly improved to 32.31% over the subsequent decade, to close at $172,000 on the 31st of December 2010.
Overall, the median house prices went up by 682.54% from 1970 to 2010.
So, going by these numbers? How does Dow Jones compare to real estate?
Dow Jones vs Real Estate
Both Dow Jones and real estate have significant benefits and challenges over each other. If you choose to go the Dow Jones way for instance, you’ll benefit from the following:
- Dow Jones portfolios require way less effort and costs to operate and maintain, compared to real estate investments. Property developers and owners incur a lot of costs on maintenance, taxes and interests, even when their respective properties are depreciating.
- Dow Jones portfolios are usually more diversified, consequently mitigating investment risks. You can reduce your risk and improve chances of success by spreading your eggs among different baskets. If one stock is performing badly for instance, you can recover your losses from a stock that’s performing contrastingly good.
- The Dow Jones has significantly lower transaction costs, compared to real estate where buying and selling property could cost you about 10% of the overall property value.
- Dow Jones investments are more liquid since they can be sold and bought on short notice.
Real estate on the other hand, has the following advantages over Dow Jones:
- Real estate investments will qualify you for tax exemptions. You’ll end up paying reduced taxes because of some tax exempted property gains, plus tax deductible mortgage rates and real estate taxes.
- Since real estate investments are largely leveraged, they will magnify your gains.
- Real estate prices are way less volatile compared to the Dow Jones, especially on the downside. If historical data is anything to go by, the real estate market has proven to be less prone to crashes and bubbles.
Comparing the Dow Jones and real estate against each other is a fairly sophisticated process since both are fairly volatile against each other, and individual returns are dependent on a myriad of factors. Take the case of short versus long term investment for example. According to the Office of Federal Housing Enterprise Oversight, real estate prices increased by more than 56% between 1999 to 2004- A period that also saw the S&P 500 index go down by almost 6%. If you expanded the period to about 25 years for example- from 1980 to 2004- you’ll find that real estate performed poorer, with an appreciation rate of 247%. The S&P index on the other hand, appreciated by more than 1000%, consequently stomping the real estate market.
It’s therefore advisable to assess the two markets on a case by case basis. Consult your financial advisor to comprehensively assess individual cases before proceeding to invest your hard-earned money.