The conventional wisdom says stocks have historically made for the best long-term investments.

But a new academic paper written by a number of economics professors titled “The Rate of Return on Everything, 1870-2015” reached a surprising conclusion.

Let me explain…

“Residential real estate, not equity, has been the best long-run investment over the course of modern history,” the authors concluded.

In all my decades in finance, nobody has seriously challenged the notion that stocks are always the outperformers over the long run – until this paper.

The academics studied data from 16 advanced economies (not just the U.S.), going back to 1870, building new data sets as necessary.

Here’s what they found:

In terms of total returns, residential real estate and equities have shown very similar and high real total gains, on average about 7.5% per year.

Housing outperformed equity before WW1. Since WW2, equities have slightly outperformed housing on average, but only at the cost of much higher volatility and cyclicality.

The last part is the really important part… housing has delivered similar returns, but with much less volatility.

The researchers also point out that for the highest gains and the lowest risk, you REALLY want to own both assets. That’s because they’re uncorrelated, meaning one when zigs, the other doesn’t necessarily zig or zag.

Specifically, the returns on housing and the returns on stocks have not been that correlated since World War II, the academics tell us. Therefore, you get “significant aggregate diversification gains from holding the two asset classes.”

A few caveats…

• It’s hard to put their study into practice. You and I can’t easily own residential real estate portfolios in 16 countries.

• The total returns on housing INCLUDE rent, which historically makes up about half of the total return in housing.

• This doesn’t assume a mortgage… But most people have a mortgage, which changes the risk/reward profile dramatically.

I could go on with the caveats. And I have to admit I haven’t spent a long time dissecting the paper yet. But doing that misses the point…

The big story out of this paper, to me at least, is that housing (including rent) might actually be a much better performing asset class than we ever thought.

It’s also nice to see that it’s been somewhat uncorrelated to the stock market since World War II.

Someday, the stock market will finally turn over and start to head down. The fall in stocks could ultimately be serious and long-lasting, as stocks are pretty darn expensive right now.

If the academics are right, housing could be a good alternative when stocks start to falter… delivering solid total returns, regardless of the stock market.

Good investing,

Steve

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Source: Daily Wealth