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Don’t Believe The So-Called Experts

Personal finance gurus Suze Orman and Dave Ramsey recently raised eyebrows when they made lofty claims about the stock market.

In a recent interview with The Wall Street Journal, Suze Orman said that it’s “very probable that you will average a 12% annual rate of return over 40 years” if you put $100 into an S&P 500 index fund every month. Piling on Orman’s claim, Dave Ramsey’s website says it is “more than possible” to get a 12% return each year on your investment in a mutual fund.

Not everyone embraced Orman’s and Ramsey’s claims. Experts were quick to react.

David Blanchett, head of retirement research at PGIM DC Solutions, told CNBC that the financial pundits’ 12% figure is “absolutely nuts” because they don’t account for inflation and volatility. Suze Orman claims that if you put $100 into an S&P 500 index fund every month, you’ll be able to achieve the claimed 12% return. That’s not accurate because it doesn’t take into account inflation and volatility. If you’re putting $100 into an S&P 500 index fund every month in 2008 during the financial crisis, your average over time will be impacted by the fact that you’ll have to dig yourself out of a hole for your returns to iron out.

Dave Ramsey claims the 12% figure comes from a New York University dataset, which says the S&P 500 average from 1928 to 2023 was 11.66%. However, when factoring in inflation and volatility, Blanchett suggests a more realistic return of 7% for investors allocated purely to stocks and 5% for investors allocated to both stocks and bonds.

For superior returns insulated from inflation and volatility, savvy investors turn to commercial real estate (CRE), which has outperformed the S&P 500 over the past 25 years. (Sitar, D. (2023, November 14). Hedge Your Portfolio Against Inflation by Investing in Commercial Real Estate.)

Why do sophisticated investors prefer commercial real estate over stocks?

Because, unlike the volatile stock market, commercial real estate offers stability and tangibility. While stock market returns fluctuate wildly from year to year, commercial properties provide reliable cash flow through rental income, acting as a hedge against market volatility as well as inflation, with rents in particular sectors keeping pace with or even exceeding inflation. In addition, CRE values appreciate over time, adding another element of wealth accumulation.

Another advantage of commercial real estate over stocks is its ability to hedge against inflation. Unlike stocks, which may struggle in the face of rising prices, commercial property rents typically keep pace with inflation, hedging against eroding purchasing power. This inherent inflation hedge adds an extra layer of protection for commercial real estate investments, making them an ideal hedge in uncertain economic times.

Besides the above-market risk-adjusted returns discussed above, commercial real estate investments offer additional benefits that stocks do not offer that add to their appeal as well as their financial value. For example, CRE investments offer favorable tax benefits, such as, depreciation deductions, 1031 exchanges, and other tax incentives can significantly reduce investors’ tax liabilities, enhancing overall returns.

Furthermore, commercial real estate investments align with long-term wealth-building strategies. Stock market liquidity, which fuels stock market fluctuations, entices investors to speculate on market timing.

Savvy investors don’t play the market-timing game. They’re willing to profit from patience and leverage the long-term value of real estate and the ability to enhance returns by adding value. Renovating a multifamily property or putting a piece of land through the entitlement process are examples of how smart investors can force appreciation of a real estate asset to enhance short-term as well as long-term returns.

Investors seduced by the allure of the fluctuating stock market are missing out on the one tried-and-true asset that has proven to not only exceed stock market returns but has done it with less risk. Some investors thumb their noses at commercial real estate investing as boring, but they may miss out on an investment that is gaining popularity: land entitlements, which involve the taking of raw land and running it through the rigorous city and county approval process to zone the land for a particular use or to subdivide it for residential purposes. Selling valuable, developed land all ready to build on can be a highly profitable venture for those willing to do the work.

Don’t believe the so-called pundits and gurus who spout numbers and figures they can’t back up. Instead, stick to a proven commodity like commercial real estate, which has proven its worth over time.

Consider revising your investment approach with Wall Street and begin exploring alternative investment options today.

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