Why Are We So Conservative?

In my last post, we discussed a recent Gallup poll that asks investors “What is the best long-term investment?” (You can find the article here.) While I find it troubling that we still believe real estate and gold are a “great” investment, I find it nearly inexcusable that 23% of those between the ages of 18-29 think savings accounts are the best long-term investment.

Why does the younger generation feel this way? I think the main reason is a short-sighted view of history and a distrust of the system. In one decade, we had two 40% drops in the stock market. One occurred from 2000-2002 (the technology crash) and another occurred from 2007-2009 (the financial crisis). In both scenarios, we watched not only our investment accounts (i.e. 401(k)s and IRAs) but also our parents’ wealth drop significantly. With so much volatility within a short period of time, why wouldn’t you invest more conservatively?

Here’s the problem, though: the younger generation is making the biggest mistake of their financial lives. As I’ve stated before, inflation is the biggest threat to savings over a lifetime and putting your money into a savings account that currently pays very little if anything will not offset inflation that averages 2-3%. If you make 0% and the cost of goods increase by 2-3%, you are in fact losing money.

Despite World Wars, the Great Depression and a few financial disasters, stock prices have historically gone up over time. But it becomes difficult to remember this in light of what has most recently happened. Such a short-term view of the economy (usually based on our biases we have) will lead you down a path that may feel all warm and fuzzy but it won’t help you 30 years from now.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All performance referenced is historical and is no guarantee of future results.

Your House Is Not an Investment

A recent Gallup poll asked Americans to choose the best option for long-term investments. The choices were real estate, stocks, gold, savings accounts and CDs, or bonds. Shockingly (to me at least), Americans voted that real estate was the best, followed by gold and stocks (tied), savings accounts and then lastly, bonds.

Why do we still believe our houses are the best option for long-term investing, despite what history has revealed? A 2013 Thornburg Investments study¹ showed real estate’s returns over the past 30 years were approximately 0.74% after inflation and capital gains taxes.

And in all practicality, that 0.74% return may even be lower when you consider the costs of owning a home. Think about the money you put into a house when you own it. You have property taxes, insurance, home owners association fees (if applicable), and the everyday expenses that go along with owning a home.

I’m not sure where we got this idea that our houses are a great investment, but I think it’s a lack of perspective. People think of the dollar amount they paid for their home ($150,000) and then what they sold it for ($200,000). They don’t take into consideration the money they put into the house over the years or how long they held onto the house. Lastly, they forget about inflation and how it erodes returns over time. Our tendency to think in dollars hurts our ability to stand back and take a different perspective. Hence, why we think our homes are a great investment.

Don’t get me wrong – I’m not arguing against buying a house. I just want you to remember why you bought the house in the first place. For most, you likely wanted to a place to call “home” for your family. Remember this the next time you start looking at your house as an investment and forget the original plan.

(Note: In my next post, we’ll revisit this Gallup poll and discuss why the younger generation thinks savings accounts are as good a long-term investment as stocks.)

1 “A Study of Real Real Returns,” Thornburg Investments, Volume 20, 2013

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.