Should you invest in real estate or stocks?

In the long run, stocks have a higher return on investment than real estate. But in some circumstances, you’re better off investing in both.

Comparing the Two Returns

If you’re trying to figure out which is a better investment over the long term, you might begin by searching the internet with a simple query like “real estate or stocks better?” You’ll be surprised to find that while most sources conclude that stocks are the better long-term investment, there are writers that come to the opposite conclusion. But not all of these writers rely on appropriate data.

The best source of information on the annual returns of stocks is the Federal Reserve. The Federal Reserve database in St. Louis (acronym FRED) is the source used here. The FRED database tabulates the annual returns of the S&P 500 index from 1928 to 2017.

The arithmetic average over those 89 years is 11.53 percent. The geometric average for the same period is 9.65 percent. For various reasons, the latter is a better indicator when assessing ROIs — if you’re curious why this is so, you can read more about the differences between them here.

While a very long view of ROIs is useful to give you a general idea of the range and volatility of an investment, in some ways a shorter view is better. The economy is in a continuing state of flux and inevitably some changes favor or disfavor specific investments and investment strategies.

For that reason, here we’ll first use the averages for the past 10 years. For the 10 years from 2008 through 2017, the arithmetic average return on investments in the S&P 500 is 10.27 percent. The more useful geometric average is 8.42 percent.

The best source of primary price data for the residential real estate market is the Case-Shiller Home…