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The key disadvantages of buying stocks compared to real estate include volatility, risk and lack of stable financing.
Volatility
The stock market is much more volatile than real estate because of the fact that stocks are traded on a daily basis. This means that the market value of stocks fluctuates day in and day out. The sticker shock of seeing stock prices fall during a selloff can be highly troubling, especially when compared to relative calm of a property whose value doesn’t fluctuate on a daily basis.
Both stocks and real estate values fall during a recession, however it’s less noticeable for real estate since it is an illiquid asset class which is not frequently bought and sold. The greater volatility of stocks is one reason why it’s harder to obtain leverage ( also known as financing) with stock holdings compared to real estate assets.
Risk
Investing in stocks can be risky, especially if you buy individual stocks as opposed to the market index or other sector ETFs or Mutual Funds. If your portfolio is heavily dependent on one or two stocks and they experience trouble, you could end up losing money overall instead of earning the average annualized market return if you had simply purchased index funds.
Being overinvested in one particular stock will induce idiosyncratic risk into your portfolio. If the company you’re invested in experiences falling earnings, a scandal, massive litigation or the loss of a CEO, the value of your stock portfolio could fall drastically even if the rest of the market is performing just fine.
Lack of Stable Financing
It’s typically very costly to obtain leverage for stock investments due to the volatility of the market. Most financing for stocks is marked-to-market which means that you may have to put up additional collateral when the market is falling. Otherwise, the financing will be taken away and you’ll be forced to sell your stocks at depressed prices.
Even though annualized stock returns are usually higher than for real estate, with real estate you can take out a large amount of stable financing at a reasonably low interest rate. For the right real estate purchase, this leverage combined with the tax benefits of real estate can easily outweigh any benefits of higher average annualized returns for stocks.
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