Why Most Investors Don't Realize Their "Average Return" Is Actually a Loss
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Your financial advisor calls to congratulate you. Over the past 4 years, your portfolio has had an average return of 25%. You feel good. You made a smart decision hiring this person to manage your portfolio.
Yet to your horror, when you receive your statement, you notice that the total VALUE of your portfolio is actually LESS than what it was 5 years ago. What happened?
Well, the “average return” is not a good representation of the true wealth you’ve created. Here’s an example. Let’s say you put $1MM in the stock market…
Year 1: 100% return - real value $2MM
Year 2: 50% loss - real value $1MM
Year 3: 100% return - real value $2MM
Year 4: 50% loss - real value $1MM
Average return: 25%
Actual wealth created: $0.00
In fact, you are actually LOSING money. How could this happen?
There is typically a 1-3% fee to manage your portfolio plus a small fee for each transaction. In addition to fees, when you sell stocks at a profit, you are on the hook for capital gains taxes. That can leave your profits on paper turning into losses in real life.
Here are four major problems with investing in stocks:
Zero Control: Unlike real estate, there is absolutely zero ability to control the value of your stock portfolio. You can’t make improvements, you can’t improve management decisions, you can’t even determine whether or not to pay yourself a dividend - you are at mercy of strangers who most likely don’t even know you own their stock.
Speculative: The stock market is simple — you hope to sell a stock at a later date for more than you paid for it. But the value of that stock is very volatile and speculative. Will other investors agree to pay you a higher price 3 years from now? How do we know the company will remain profitable between now and the date you plan to sell?
Zero Cashflow: Unlike real estate, stocks typically do not provide much cashflow. Are you looking to cover your monthly expenses with investments? Real estate is a far better investment.
HUGE Tax Liability: Let’s say your financial advisor has a good year and is able to increase your portfolio value by a million dollars. They decide to capture those gains by selling some stocks and converting to cash. Now you have a million dollars in capital gains. If you’re in the 37% tax brackets, you now have a $370,000 tax bill to pay.
In contrast, real estate investing has REAL returns and tax advantages.
Direct real estate investments provide you with regular cash distributions, protect your capital, and have HUGE tax benefits. In fact, it’s not uncommon for RE investments to pay you a regular cash distribution and show a paper loss at the end of the year - saving you thousands or millions in taxes.
Multifamily investments are a stable, predictable vehicle — great for capital preservation and wealth generation.
The returns are typically much better than the stock market.
So the next time your financial advisor says your portfolio is up 100% or has an average return of 25%, look deeper, look at the true dollar amount in your account. Sometimes what looks great on paper turns out to actually be a loss.
It may be time to move some of your wealth into multifamily investments.