With $1 million invested and $500k in cash — is now the time to dive into real estate?

Over the past century, the stock market has been on an incredible growth trajectory. Even over the past few decades, the Dow Jones Industrial Average and the S&P 500 have marched virtually lockstep, posting an average gain of 10% annually.

Obviously, in any one particular year the indexes will exceed or underperform the average, but over time they have been remarkably consistent. Even after corrections, bear markets, recessions, and depressions, the stock market always bounces back and eventually wipes away all remnants of the prior declines.

It is why for the vast majority of investors, simply buying an index fund and holding on for the long-term is the best and simplest option. And yet we can do better. Although billionaire superinvestors like Warren Buffett, Peter Lynch, and others who consistently beat the market are seen as outliers, it also proves it can be done.

A common trait among them is buying for the long haul. They are not traders, jumping in and out of stocks, but instead they buy a stock with the idea of never selling. They do, in fact, sell stocks, but ideally they want to own a company for decades.

This was brought to mind by a Redditor on the r/fatFIRE subreddit whose net worth has grown to $1.5 million primarily owning a handful of tech stocks and a few mutual funds. Now he thinks he should diversify his holdings and is considering getting into real estate.

24/7 Wall St. Key Points:

• A diversified portfolio is a key ingredient to growing wealth over time. 
• While index funds are not sexy investments, the “plain vanilla” strategy of buying and holding for the long term an S&P 500 exchange-traded fund (ETF) can give you instant diversification.
• Stocks have outperformed every single asset class over the past 100 years, making index fund investing a smart choice for most.
• Retiring early is possible, and may be easier than you think. Click here now to see if you’re ahead, or behind. ^(Sponsor)

Diversity is strength

Diversification is a smart strategy. Although Buffett has pooh-poohed the idea in the past, telling Berkshire Hathaway (NYSE:BRK-A | BRK-A Price Prediction)(NYSE:BRK-B) shareholders “Diversification is a protection against ignorance,” it still makes sense for most people. It ensures you don’t have too much riding on any one thing.

For the Redditor, he has about 70% of his investments tied to just five stocks and over the past few years that hasn’t been a bad choice. Since the end of 2022, the tech-heavy Nasdaq 100 index has nearly doubled in value, outperforming the S&P 500 by about 60% on the advent of artificial intelligence.

Yet that was driven mostly by just a handful of companies, the so-called Magnificent 7 stocks, which is primarily what the Redditor owned. They are now some of the most valuable stocks on the market.

While each has some rather long tailwinds behind them still that should see them grow over time, increasing his portfolio’s diversity would protect against any serious devaluations that might occur in the future.

Which asset class is best?

Is real estate the best option, though? While I’m not a financial planner, so this is only my opinion, real estate does introduce diversification. Yet while there are many real estate millionaires, the sector has not been a particularly good, long-term investment.

A study by Deutsche Bank (NYSE:DB) looked at the returns of various asset classes over the past 100 years and found that since the end of 1920, there has been no better investment than stocks. Equities outperformed 10-year and 30-year government bonds by more than 4.5% per year, corporate bonds by 3.7%, Treasury bills by 6.8%, gold by 5.6%, and oil by 8.4%. It has outperformed real estate by 6.6% a year, suggesting you might do better buying gold than property.

Key takeaway

While it’s not as sexy as buying the latest AI stock, it shows why buying an S&P 500 fund such as the Vanguard S&P 500 ETF (NYSEARCA:VOO) or SPDR S&P 500 ETF Trust (NYSEARCA:SPY) might be an excellent investment.

The benchmark index, of course, tracks the performance of the 500 largest companies in the market. Buying an index fund gives you instant diversification across industries, geographies, and businesses. 

While real estate can play a role in a portfolio that is already well-diversified, it would be my first investment choice, but working with a qualified financial advisor who can more accurately answer your financial questions based on your personal situation should be your first step.