Cryptocurrency vs Stocks vs Real Estate: Where Is The Opportunity Right Now? To answer this question, we need to look at the one area people are running away from. “Be fearful when others are greedy and greedy when others are fearful”. People are getting greedy right now with stocks and with cryptocurrency. The peaking prices are drawing people from around the world into what looks like a massive opportunity.
If you will have seen the film ‘The Big Short’ you will know that prior to the 2008 crash, there was massive hype around the real estate market. People were over-leveraging into the housing market and buying 4 or 5 properties. However, rather than excitement being around real estate this time, it’s directed towards cryptocurrency and stocks.
Disclaimer: This article should not be considered as financial advice. You are responsible for your own financial research and decisions.
Andrew/ Mr Money Side Up
Cryptocurrency & Mainstream Adoption
This feels similar to the last Bitcoin bubble but this time it’s far more meteoric, with all the components of an asset bubble.
You may have seen the likes of JP Morgan, Tesla and major corporations buying into Bitcoin recently. Which to many people out there signals the mainstream adoption of cryptocurrency.
However, let’s not forget that all the major banks such as JP Morgan were also majorly invested in the Credit Default Swaps that were a driving factor in the 08/09 crash.
JP Morgan managed to de-risk away from CDOs a couple of years before the crash, as a result of this they mostly steered clear of the credit crunch. JP Morgan suffered $5 billion in losses on high-risk CDOs and leveraged loans whilst others lost significantly more:
- $33 billion at Citi
- $26 billion at Merrill Lynch
- $9 billion at Bank of America
On top of this, they also had to pay $153.6 Million to Settle SEC Charges of misleading investors in CDO tied to the U.S. housing market
Personally, I am staying as far away from cryptocurrency as possible. There is a chance I could be wrong here, but Bitcoin is a speculative investment and it’s far too volatile to be used as a mainstream currency.
A currency is a trusted and stable medium of exchange. In order to be adopted it would need to pass this criterion. In order to do that, something like Tether or True USD would be a better starting point for mainstream adoption.
The Stock Market Bubble
I am of the opinion that the stock market may be a little inflated right now, and there are a number of indicators such as the S&P 500 P/E ratio that point towards this.
The historical average has tended to trend about 20 to 25 but currently, it’s at 38. As you can see from the chart below, the P/E ratio peaked in 2000 and 2008 and this coincides with two major stock market crashes.
However, ultimately my financial plan has not changed in this respect and I have talked previously about why attempting to time the market can half your returns. Additionally, there is still a vast amount of growth potential in the stock market.
This approach has brought me a good level of stable returns over the past few years so far. Despite the political and economic instability (e.g. Brexit).
Stocks Vs Real Estate
One of the areas of the market that actually seems to be suffering is real estate. The impact of covid seems to have had a more prolonged suppressive effect on REITs.
An REIT is a portfolio of commercial real estate companies that own office buildings, retail spaces, apartments, and hotels.
I didn’t notice this for quite some time because the residential market in the UK is still on a bull market run. With exception of London rental prices which have dropped by up to 34%.
For example, the one year return of something like the iShares Global Property Securities Equity Index Fund (UK) H Acc is down 12%. Although it partly recovered from its March crash, it’s still about 15% down from the January high.
This is the same story for the range of similar funds which focus on tracking the benchmark index of equity securities of leading property companies listed globally.
This seems to indicate the real estate presents a unique opportunity. When I identified this opportunity I was keen to understand my asset allocation in terms of stocks vs real estate.
My Portfolio: Allocation Of Stocks vs Real Estate
Although my fund is primarily based on tracking stock indices such as the S&P 500, my fund has shifted to a 13.4% allocation in real estate funds. With 9% in the iShares Glb Prpty Secs Eq Idx (UK) L Acc.
I had always been wary of my fund having a degree of active fund management. I was worried that in the event of a stock market decline they would shift away from stocks.
However, in this instance, they have done exactly what I would have done, which is to invest money into real estate specific stocks.
The main benefit of my current fund taking this action is that it’s more simplified and tax-efficient than if it would have had to start investing in a second fund.
Whilst taking advantage of the significant dip in real estate vs stocks, 90% of the portfolio is still weighted towards stocks of other industries.
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Investing In A Bull Market Run
You never know what the stock market will do next. Maybe it will crash this coming year or maybe there will be another 10-year bull market.
However, if you are not yet invested and you are worried about getting into the stock market right now because you think it might crash then REITs may be a potential option. They offer a good potential upside having not recovered fully since March.
The average annual return from long-term real estate investing is still around 10.5% which is similar to the S&P 500.
There are also funds with very reasonable fees:
- iShares Global Property Securities Equity Index Fund (UK) H Acc [0.18% ongoing charge)
- Legal & General Global Real Estate Dividend Index Fund I Class Accumulation [0.2% ongoing charge]
I don’t pretend to be any kind of real estate expert but I do find the performance of various assets naturally interesting.
My knowledge of REITs and property funds is still at quite a beginner level. However, I thought I would share my thoughts on the current market pitfalls and opportunities.
My Plan
Hopefully, this nudge towards property will result in better returns and enhance my plan to retire at 45.
However, the plan is to maintain a strong stock allocation of around 90% globally diversified index funds in both developed and emerging markets.
You should only ever invest in what you understand and 95% of my investing knowledge is based on this type of investing. This approach has allowed me to confidently grow my net worth from £20,000 in 2017 to £60,000.
If you want to plan how much you might need to invest each month in either the stock market or property to achieve financial independence, you can use my financial freedom calculator.
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