Stocks vs. Real Estate(ZT)--(II)

Round 7
Volatility
One visitor to CNNMoney.com wrote: "I once lost 20% in one week holding Hewlett-Packard stock. That situation will never happen to me with a smart purchase in real estate."

He's got a point. Because real estate takes so much time and effort to buy and sell, it rarely soars or plunges. The Francis-Ibbotson study, for example, found that over the 27 years surveyed, homes in their worst year returned 3.5% and commercial property lost only 5.6%.

The S&P 500's worst annual performance was a 22.1% decline. That doesn't mean you can't lose your shirt and everything else on real estate. Hartford, Houston and Los Angeles, for example, experienced 20%-plus price drops at some point since the '80s. But those declines unfolded over several years, and all three markets recovered.

On the other hand, we're still a ways from knowing whether the current slowdown in the housing market is about to end or is only getting started.

Round 8
Diversification
Mama told you not to put all your eggs in one basket. And so it goes with investments. Diversifying among asset classes, industries and investment vehicles makes you safer. When one falls, another rises. Amassing a diversified portfolio of individual stocks, bonds and other paper assets may take a lifetime of saving. But with a cash outlay of $2,500 or so, you can get instant variety by purchasing a mutual fund or an exchange-traded fund.

Not so with real estate. Unless your surname is Trump or Helmsley, you're not likely to have the means to own the hotels, stores, apartments, office buildings, parking garages and casinos you'd need to achieve a properly diversified real estate portfolio.

There is, however, a real estate investment that offers the low costs and low maintenance of stock: the equity REIT, a company that owns a batch of commercial properties. The shares trade on national stock exchanges, and Francis and Ibbotson found that equity REITs returned more than any other asset class except small-cap stocks.

But as an asset class, REITs don't behave much like property. They can drop like rocks in a well. In their worst year, they lost 17.5%. And they've never returned as much as they have in recent years, when they've benefited from investors' enthusiasm for both the real estate and stock markets.

There's no way to know whether that streak can continue or whether this is an asset class that's just about punched itself out.



Decision
Stocks win the bout four rounds to three, with one round a draw. But the fight is in truth considerably more lopsided.

Stocks roll up large margins of victory in performance, costs, diversification and effort you need to expend as an investor.

Real estate's only big win is in leverage. Using that leverage to buy a home you can afford makes sense. You're building equity and collecting other benefits as well. (And no landlord can stop you from owning a big, hairy dog or throwing a party for 200 of your noisiest friends.)

But jumping into the real estate ring thinking you'll use others' money to score an investing knockout is plenty risky. And the big prize, as you may have noticed if you've tried to flip a condo lately, is more elusive than it might have seemed.