The baseline result of any investment should be simple:

Earn money while you sleep.

Yes, yes, the “first rule of investing is to not lose money”. However, if we’re talking about not losing paper currency, then a tin can in the backyard can be considered investing. Or if we’re talking about not losing the value of what you have now, then you at least need to beat inflation.

So let’s be just a little more demanding.

Let’s say that a secure and profitable investment portfolio needs to satisfy these conditions:

  • potential for high income
  • potential for stable income
  • capital appreciation
  • inflation protection
  • asset diversification

Now we’re cooking!

So we have to compare different investment types to see what can meet our demands.


Which Investment Class Beats Stocks?

Buying stocks and bonds is a tried and true way to save money, have some built in diversification, and generate income for your retirement.

We are very lucky to have access to this investment type.

And now, more than ever, with no-fee trading platforms and low-cost ETFs that track the market — along with established theories like Dollar Cost Averaging — the average person (or above-average earner, in your case) can set themselves up nicely for the future.

But this is only one part of the story.

And if it’s ALL you’ve got, then you are missing out on some massive savings and earning potential, not to mention leaving yourself open to unavoidable market drops at the worst possible times (eg. upon retirement).

The key is to focus on “risk-adjusted returns”.

That means comparing the potential profit to the amount of risk you must accept to achieve the profit. The most popular way to measure this is to compare it with a virtually risk-free Treasury bond over the same time frame.

In a nutshell, the bond has a next to zero chance of losing money. On the other hand, you barely beat inflation (or lose to inflation, depending who you talk to).

Whereas if you buy a piece of art from an unknown painter who MAY become famous, you take a huge risk but with the potential for a huge reward.

In our examples above, the low risk investment will never build significant wealth. And the high risk investment will likely leave you broke 999 times out of 1000, which is no different than gambling in a casino.

But it turns out there is ONE TYPE of investment that is the out-and-out clear winner of risk-adjusted returns, no matter what measurement is used.


The True Power Of Real Estate Investments

Real estate has traditionally out-performed stocks and bonds, specially when risk is taken into account.

You can buy into different companies, areas, or countries… but you don’t have true diversification if you only play in the stock and bond market.

Real estate merges high income with stability.

It also provides a natural and powerful hedge against inflation. Rents and property values are highly correlated with rising prices.

There is also the fact that generational old-money uses real estate as a foundation for their wealth.

If you want to generate a firm financial legacy, then real estate is the main tool.

But there are different types of real estate to consider.


Private Real Estate vs REITs: Who Wins In A Fight?

There are two popular vehicles for real estate investment:

Private Real Estate and Listed Real Estate Investment Trusts (REITs).

REITs are technically stocks, issued by companies that own and manage pools of commercial property.

Their key differences with actual private real estate are:

  • Volatility: private real estate has lower volatility than REITs, and so compared to their similar returns, the risk-adjustment return of private real estate is higher
  • Liquidity: REITs are more liquid, being traded like stocks… which of course comes with the tradeoff of increased volatility
  • Diversification Benefits: real estate rarely suffers losses at the same time or degree as stocks, and even though REITs correlate slightly to private real estate, they are still closer to traditional stocks/bonds
  • Tax Benefits: private real estate comes with special tax deductions and protections not available in any other asset class

Both REITs and private real estate allow for higher returns and a comparable inflation hedge.

Now, while all that theory is well and true, it helps to look at actual performance.

Let’s take the 20-year period leading to 2019.

  • from 2000-2019, U.S. private real estate had slightly lower absolute returns than listed REITs: 8.4% vs 11.6%
  • but private real estate had much lower volatility: 8.4% vs 21.5%
  • using the Sharpe Ratio to calculate risk-adjusted returns, private real estate edged REITs: 0.80 vs 0.46

So, in conclusion, a properly diversified portfolio for the serious investor looking for generational wealth will include stocks, bonds, REITs, and private real estate.

But when it comes to risk-adjusted returns and tax benefits, private real estate is king.