For the next decade, which asset class among stocks, bonds, real estate, cash, gold/metals, or bitcoin/cryptocurrency, would be the best vehicle to invest money for the highest long-term total returns?

Since 1890, the S&P 500 (or its predecessor indexes) has outpaced inflation at a 6.3% annualized rate (when including dividends). Long-term U.S. Treasury Bonds have produced an annualized inflation-adjusted total return of 2.7%. Finally, U.S. real estate has produced an annualized return above inflation of just 0.4%, as judged by the Case-Shiller U.S. National Home Price Index and the consumer-price index.

Yet, the U.S. stock and bond markets are currently overvalued, and it is plausible that real estate will do better than either stocks and bonds over the next decade.

According to almost all standard valuation metrics, U.S. equity stocks currently are somewhere between overvalued overvalued. Furthermore, you can only partially explain away this overvaluation because of low interest rates.

Given stocks’ overvaluation, it’s entirely possible that stocks will over the next decade have the potential to fall short of their historical averages.

To the contrary, real estate has been relatively undervalued and historically less volatile than the stock market—a lot less as measured by the standard deviation of annual returns.

As a result, real estate has proven to be less riskier than equities. Yet, the misperception that real estate is riskier has been derived from the leverage typically used when purchasing real estate adds inherent risk to investing in real estate. Essentially, the risk for real estate comes from the leverage, not real estate inherently.

If there is a major stock bear market in the next decade, real estate might be the better investment just because of it’s lower risk and relatively undervalued.

Sources:

1. https://www.marketwatch.com/story/the-single-best-investment-for-the-next-decade-2019-08-08
2. https://www.marketwatch.com/story/stock-bulls-are-telling-themselves-a-lot-of-lies-about-this-market-2019-06-04