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Here's a sample portfolio.

If we assume that he invested $100K in the beginning (2005), is it correct that if he sold his entire portfolio and the end of 2009, he would have received $121,394?

Seems like a rather mediocre ROI to me. Would it not make more sense to invest this $100K into real estate? I think the return will be more than 4%/year on the average for real estate. Or am I missing something?

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2 Answers

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First, yes, I think your calculation is correct.

Next, on your more controversial second question, two points:

  1. Recognize that you're benefiting from hindsight in making your assessment about the returns from real estate (presumably Canadian) being better than the "mediocre" portfolio returns. In 2005 you could not have known that in advance. And today, you also can't say what the future will bring.

  2. If one were to invest $100K entirely in real estate, as opposed to a diversified portfolio with multiple asset classes, one would be taking a much larger risk due to being concentrated in a single asset class. What if real estate seriously tanks? Then the whole $100K suffers much more than if real estate were but one component of the portfolio.

The entire point of investing in a diversified portfolio of cash, stocks (domestic and foreign), bonds, and real estate (via REITs, which are one piece of the portfolio you mentioned) is to reduce risk. Chasing returns alone can be foolhardy.

I suggest you research the following subjects:

  • "diversification",
  • "risk-adjusted returns",
  • "Modern Portfolio Theory".
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thanks for research suggestions. I'm out to learn about portfolios and commodities, not to criticize them. –  Saideira Nov 2 '11 at 20:26
    
Understood. Real estate is one of my hot-buttons, that's all :-) –  Chris W. Rea Nov 2 '11 at 20:29
    
Also, here's a good question to check out here, if you haven't seen it yet: money.stackexchange.com/questions/2284/… –  Chris W. Rea Nov 2 '11 at 20:31
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Does 2009 look like you'd have made a profit looking back 4 years? The portfolio from your link looks great in hindsight.

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I think the OP may have been referring to Canadian real estate, which hasn't plunged like that (yet?) .. but your argument still stands. –  Chris W. Rea Nov 2 '11 at 23:41
    
I'd be curious to see the annual price change for Canadian Houses. Either way, the 4% rule OP cites is far from a certainty. –  JoeTaxpayer Nov 3 '11 at 0:12
    
Indeed! Also, satisfy your curiosity on page 9 of this recent report from one of our Canadian banks: scotiacapital.com/English/bns_econ/retrends.pdf .. and to see increases in specific Canadian markets, see this interactive chart: cmhc-schl.gc.ca/en/corp/about/cahoob/cahoob_005.cfm .. notably, Vancouver went nuts, Windsor went nowhere. Finally, I'm always entertained by one of our former Members of Parliament at greaterfool.ca, who has long written about the Canadian real estate frenzy. –  Chris W. Rea Nov 3 '11 at 0:38
    
Canadian market has been very good and still is very good, especially in major metropolitan areas. I believe this has to do with RE prices not as inflated due to more strict lending policies in Canada; as well as a large influx of immigrants. What I like about investing in RE is that by placing minimum downpayment and making small mortgage payments, after 2-3 years your ROI is about 30%+ due to rental income and RE appreciation. I think this strategy would be valid even in a US market. –  Saideira Nov 3 '11 at 11:00
    
@Saideira What you said amounts to leveraged investing in a speculative asset. Be very careful. –  Chris W. Rea Nov 4 '11 at 13:57
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