The Pros & Cons of Your Investment Options
By understanding the following investment strategies you can decide how to diversify your retirement portfolio accordingly. For the purpose of this section we will only focus on the Real Estate Investing, Stock Market Investing, REIT’s, CDs, and Bonds
Real Estate
Advantages:
- Tax advantages: write offs for depreciation and expenses, shielding from FICA taxes, deferral from capital gains taxes
- Low risk: low volatility and slow where you can see markets changing and have time to get in or out of investments. Home insurance protects you from complete loss. Other investments may not protect you from complete loss.
- Strong returns: 3 sources of income and a long term upward appreciation trend due to the population increasing and less real estate available
Disadvantages:
- Illiquid: can’t get in and out as quick as other investments
- Higher transaction costs usually
Stock market
Advantages:
- Liquid asset you can get in and out of quickly
- Stock market has gone up long term, hedging against inflation.
Disadvantages:
- Very volatile, High risk as Markets are subject to severe short term fluctuations
- Market crashes are possible as seen in 2008-2009
- Investments are not insured if market crashes so you lose everything
- Influenced by many factors: Terrorism and world political situations, fraud and bankruptcy, insider trading, etc
- Double taxation of earnings
REIT’s
For people who want to invest in real estate but don’t want the responsibility and headaches of handling tenants, Real Estate Investment Trusts (REIT’s) are the way to go. Think of a REIT as a mix between investing in stocks and real estate. These real estate firms raise capital by selling shares to the public that they can then go spend on real estate deals. A share of the profits goes to the investors holding shares in the form of dividends.
Advantages:
- REIT stocks can appreciate
- Pays higher dividends than other stocks usually
- Passive real estate ownership
- Liquid unlike normal real estate since this investment is a stock
Disadvantages:
- Returns aren’t as good as if you owned the property yourself
- Stock price could fall and your money isn’t insured
- No leverage
Bonds
Advantages:
- Low risk returns
Disadvantages:
- Dependent on interest rates
- Inflation risk
- Mediocre returns
Certificate Deposits
Also known as CDs, certificate deposits are investments where you lend your money to the bank for a fixed interest rate that is usually higher than if you left it in your bank account. Since you’re locking up your money anywhere from 1 month to several years, CDs are generally an illiquid investment.
CDs used to be a good investment but with today’s low interest rates it’s tough to keep up with inflation and you may see better returns using other investment options.
Final Words…
Overall, investment returns vary by risk. You’ll find high returns in real estate and the stock market. I personally enjoy real estate investing for the control factor as I get to choose my tenant and how much I spend to do the rehab budget when I first buy the property. Other things are out of my control but I feel I can be in control of my real estate purchases and find properties with high returns.