Expert: Paul Henneman - 5/12/2006

Question
I would like to start investing and would like to find out what is more profitable, stock or real estate.  I do not have any credit card debt, will receive a pension from my employer and $400 is contributed to my 401K monthly so I think its the right time to start investing.  I know that the upside to real estate is that you can take a tax deduction yearly and can have a place to live after retirement (probably invest out of state).  What are the positives of stocks and what type of earnings due they yield?  Thank You.  

Answer
Alyssa,

Thank you for your question! While I am not an expert in real estate, I can certainly provide some ideas on what can be expected of investments in stocks.
There are of course many ways to invest in stocks, and the stocks you buy or sell depend greatly upon what your overall goal is. More agressive investing can see higher returns, but is more volatile. This means that you would have a significant chance of losing money at times, but would make a greater amount at other times. Over a long period, this averages out to a higher return than a more conservative approach. However, investing in large cap stocks would produce less wealth in the long term, but help protect against losses that are too high in the short term.
Investing in stocks is difficult for this reason. What to buy? It takes alot of time and research to do this well. Even after deciding what to buy, the markets and even individual companies change on a constant basis, so holdings need to be continually monitored and re-evaluated to make sure you should continue to hold them, or sell and buy something else.
The best way to start would be to consider doing two things, in my opinion. The first would be to purchase index mutual funds. These are mutual funds that are designed to match overall market performance. The most appropriate would be an S&P500 index fund. You would be sure of matching overall market performance, always. If markets are down, your investment would be down also, and the same would apply if markets are up. Over time markets go up, with periods of a few months, possibly as much as a year or two of down markets. But they always recover to profitability.
The second thing I would suggest are other mutual funds in other areas. Mutual funds are run by experienced portfolio managers. It is therefore possible to take advantage of thei research and lifetime of work in the field. It is always best to  invest in several mutual funds, each that specializes in a different area. For example, a technology fund, one in health care, energy, biotechnology, real estate, or utilities are some others.
The best known place to reserach mutual funds is www.morningstar.com
Before doing any of the above, I would recommend the book "Investing for Dummies". This book will give you all of the basics you need for mutual funds, as well as most other investment options (such as stocks and bonds). There are sources provided should you want to do more interest in a specific area.
If you would like to read some material about investing directly in stocks, I would suggest reading anything by William O'Neil. Always read with a very critical mind, but even if you do not agree with O'Neil his books show the types of processes that are needed to successfully invest in stocks.
With a great deal of time and commitment, you can see average returns of 30% or more per year. Other advantages are that stocks and mutual funds are fairly liquid compared to realestate. Also, most investors do not take into account the taxes and other costs of holding realestate, that can really eat into profits. Returns will not always be so good for realestate, the one thing you can know for certain is that everything in the investment world comes in cycles. It is always good not to have all of your eggs in one basked so to speak, and to diversify into other areas.
I hope this helps! Please do not hesitate to follow up if I can be of any further assistance,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com
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