Thursday, July 1, 2010

Another diamond in the rough

It has been a busy June and not a lot of time for blogging. Today I met with a fellow investor and we discussed stock market versus real estate risk. I pulled out a previously posted graph showing real estate performance versus stock market appreciation (without leverage, rents or dividends) since 1970 (see below). He quite astutely noticed that real estate and stock markets are counter correlated, that is that when the stock market was performing better than average, real estate performance was subdued. Visa versa when the real estate did outperform average investment return, the stock market underperformed.

This is good for those investors that look at diversifying their portfolio. In the past, stock market investors tried to invest into countries whose stockmarket performance differed, i.e. whose stock market performances did not correlate well. With globalization, stock market performance of most countries is much more synchronous, i.e. they are well correlated. So when stocks in country A perform poorly, those in country B tend to do poorly as well. Several stock market gurus suggest that it is now bettter to diversify by investing in different industries rather than countries to achieve uncorrelated performance - at least that is the idea.

As observed by my fellow investor, investing in both the stock market and real estate also provides excellent diversification.

One caveat, the real estate appreciation curve shown above is for single family dwellings in Calgary, Alberta. Real estate markets are local markets and the correlation between the stock market index and your type of real estate investment property in your local market may differ.

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