I Can Get a Higher Return by Investing in Stocks.
Fact: You Can’t Live in Your Portfolio While You Create Wealth
If you bought shares in Google stock a couple years ago at $100 per share, and you’ve held onto them (even though selling and cashing in has to have been awfully tempting), today you’re a pretty happy camper: Google stock currently trades at more than $520 per share. If you bought $100,000 worth of shares in 2004 those shares are worth over $520,000 today. (Sounds like a percentage gain similar to people who invested in Southern California real estate!) You might be thinking, “If I can find the next Google, why should I put my money in a house?” If you can find the next stock that will perform like Google, maybe you should. (But first let us know which stock it is!) Returns like that are rare, though—most investors are very happy if they can earn between 8% and 10% over the long term; many mutual fund managers struggle to achieve those kinds of returns on a long-term basis. Investing in stocks should be one component of your investment portfolio, but let us ask you: Can you live in your shares of stock? Of course you can’t. We all have to live somewhere—it makes sense to build wealth through real estate first, then expand through other investments. Paying rent really is like paying someone else’s mortgage. The one thing almost all financial experts agree on is that investing in real estate, especially in your personal residence, is a key component of almost everyone’s investment portfolio. As the “house vs. stock” chart below illustrates, if you have $100,000 to invest and you don’t own your residence, put at least some of that money towards a house—you’ll build wealth and security while you take care of a basic need. And you can always buy the house with $10,000 down and invest the rest in other ways! (See Figure 1.5.) Don’t forget about the tax break you receive from your residential investments. First, you get an annual tax break on the mortgage interest and property taxes you pay, assuming you itemize your deductions. When you sell the house, assuming you lived in it for at least two years, you get to keep $250,000 of the profit tax-free ($500,000 for a couple)! You won’t get that tax break by investing in stocks and bonds.
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