Still Buying the (Golden) American Dream…

This recent Gallup survey on expected future returns of asset prices is pretty interesting.  It shows that most Americans still think that owning a home is the best way to generate a high return in the future:

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Look at those figures.  The top two assets are gold and real estate.  This shows how out of touch with reality the average American is.  According to the U.S. Census Bureau Survey of Construction single family real estate generates a 0.74% annual return over the last 30 years (this includes multiple housing booms, mind you, so the data is probably much lower if we go further back in time).  So there appears to be some recency bias here despite the housing bust.

And this doesn’t even account for many of the miscellaneous costs involved in real estate.  As I’ve shown previously, a house is basically a depreciating asset that comes with an appreciating piece of land.  But that depreciating asset is extremely expensive over its lifetime.  When you calculate the total costs that go into maintaining this asset the returns are very likely to be negative over long periods of time.  So that 0.74% figure is probably higher than you should really expect.   In fact, the returns from stocks and bonds trump real estate by a healthy margin so Americans have this one totally backwards – the American Dream isn’t quite the dream we have been sold.

Gold is more interesting.  Gold is a commodity that is widely perceived as a currency.  If you look at the long-term returns of gold in the post-Bretton Woods era the real returns are pretty substantial at 7.8%.  That’s not much below stocks at 8.4%, but substantially higher than T-bonds at 3.2% and higher than the aggregate bond index at 5.4%.   This is interesting when you consider that gold is really just a commodity and commodities don’t tend to generate real returns over the long-term.  I’ve surmised that gold has a “faith put” in its price due to the currency belief.  Whether that can last over the long-term is dubious in my view.  So I wouldn’t be surprised if that view turns out to be wrong as well….

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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    • As a general guideline – somewhat useful, but highly imprecise. I prefer to look at asset classes as they pertain to the capital structure. For instance, there’s simply no reason for a commodity like gold to sustain high real, real returns for longs periods of time given that it has no cash flow or underlying output. Stocks are obviously a different story because they represent the real output and cash flow of an underlying corporation. Bonds are similar, but lesser. So there’s some common sense and operational understanding of the capital structure that underlies this more general historical analysis.

      • It would be more interesting if the polls are compared by different categories of wealthy people such as 0.01%, 0.1%, 1%, …

        Then the polls can hint something about wealthy inequality.

  1. Regarding a house, I might take it a step further.

    It is a durable good. It requires (comparatively) an enormous amount of $ to maintain, repair, or upgrade. It truly is a money pit (the movie).

    You buy a house on the basis of being lucky enough to afford one. It has no business being a part of your ‘saving’s allocation’ mix.

    That way you can dump at any time. (assumed: the debt on it is paid)

    Even land can depreciate. Just not very often.

  2. You can’t analyze home ownership without including the annual tax savings from the mortgage deduction and property tax deduction. Even without consideration of capital gains, those benefits make home ownership as cheap or cheaper than renting for many people, thus effectively providing an annual ‘income’ from home ownership.

      • Doesn’t seem that your point and wally’s are necessarily at odds. I think you’re both correct — a house shouldn’t be considered an “investment,” but if you have good credit and a reliable income, given tax benefits, purchasing a house is often much better for personal cash flow than renting is.

    • In the New York county where I live, total property taxes are 330 basis points per year on a full market value assessment, which is adjusted every year. It is even worse in parts of New Jersey. Add depreciation to that (which you must, because dated and worn interiors and exteriors can make a house sell at a 40 per cent discount to updated homes), and it is almost impossible to come out ahead on a home purchase today. The experience in Manhattan, high end parts of Long Island, high end Hudson Valley etc. might be different, but that will be fewer than 5 per cent of the New York housing stock. I know of a modest house bought for $18000 in circa 1958 which sold for $400000 in 2006 at the bubble peak, but those days are over.

    • In our case, we had a house in Brooklyn NY for 26 years and sold it for 10 times what we paid for it. We did no great remodeling and raised 3 children in a safe neighborhood. Then we sold our next house in Tarrytown after 20 years, added a bathroom and sold it for 4 times what we paid. We now live in a house that is part of a condominium that cost half of what we paid for the Tarrytown house. The taxes, etc. paid for a lifestyle and marriage that had immeasurable value to us.
      Just our way of appraising home ownership.

  3. Cullen,

    If you look at investment opportunities, you can’t look at real estate without taking into account of rental income. If someone has $100,000, he/she could either buy stocks and buy a property and rent it out. So you have to include rental income if you try to compare asset classes as investments. When you add 5% rental income, real estate is on par with stocks.

    • Your 5% income return is assuming that you own the house outright, which most homeowners do not.

    • I would place commercial real estate and rentals outside of this analysis. I am more focusing on the average American homeowner who simply buys a house to live in it. But yes, in general, I would agree that real estate can be a fine investment if you can generate income from it in various ways. But that’s a whole different analysis than what I’ve focused on….

      • The survey question is not about home ownership it is worded “what do you think is the best long term investment” and so rental income figures in it.

      • The survey is about investment. The headline is about the American Dream of home ownership. Thus the confusion. Cullen created the headline, so apparently he wanted to discuss the second topic. No one knows what the respondents were thinking when they answered the survey question.

    • I think, It will be hard to find property suitable for renting, for $100,000, more likely in $300,000- $400,000 range. And then, 5% of 400,000 would be $20,000 a year net. It will be hard to find tenants paying $2000 a month in some areas.
      So, more realistic is to say 2% return on renting. But if you have only $100,000, you need to borrow remaining $300,000 paying at least 3% a year, so this will erase all your gains. And being Landlord is not easy or cheap either. Maintenance costs money too.

    • Tricky subject. Here’s my general view:

      1) No one is hypocritical for thinking income inequality is a problem even while they make a lot of money.

      2) BUT, if I were a wealthy retired professor being hired to do part-time work promoting income inequality for a think tank I probably wouldn’t accept a salary that places me in the top 5% of income earners because it would give the appearance of a highly biased view which could actually detract from my promotion of that very view.

      3) More generally, I very much dislike it when a social scientist gets paid huge sums of money to promote a specific political view. I think it compromises their ability to remain objective and unbiased. In some ways, this reminds me of people like Frederic Mishkin who was hired by banks and bank lobbyists to promote banking deregulation. At this point you’re no longer doing science. You’re being paid to do politics.

      • I think your point are valid, but I’d add a few things that push back on your pessimistic take:

        1. What are the odds this was anything other than a pay decrease for Krugman? By all accounts (I didn’t go there), CUNY is a heck of a public institution, but in terms of financial clout, it is not in the class of Princeton. It seems very likely Princeton paid Krugman more than this. I know this is speculation, but come on, I don’t think it’s exactly crazy to assume that one of the richest and most prestigious academic and research institutions in the world would’ve paid a Nobel Prize winner more than CUNY.

        2. The inequality discussion — when properly tuning out the outliers on the fringe left proposing actual communism, and the outliers on the right building strawmen about the top 10% — largely focuses on the top 1% (and since Piketty’s book went English and has been more thoroughly reviewed, we now even see more and more focus going to the 0.1% and 0.01% as far as inequality goes).

        3. I think your third point has the correlation running backwards. It seems to me that Krugman isn’t so much being paid to espouse a view, rather, he’s being paid because he has already espoused certain views (along with heavyweight professional credentials). Krugman is understandably a polarizing figure because he’s vocal about his politics, but while Suvy will disagree vehemently :p, I think most folks that even disagree with Krugman have to grant that he has the intellect and earned professional credentials to be worthy of a pretty nice gig.

        And he would continue to harp on these things, given that he believes them, whether he were employed by CUNY and working on the LIS and writing for the NYT, or whether he went into pseudo-retirement and blogged on WordPress from the comfort of his rocking chair on the front porch.

        4. Also on your third point, is the LIS really strictly a case of “doing politics?” It’s damn near impossible to separate politics, especially on a discussion of inequality, but it doesn’t mean that there isn’t truly valuable work in mining data about historical and international wealth and incomes. I think this is very very important work, not just because I personally believe inequality can be problematic, but because more study could just as well prove otherwise. For example, maybe work like this uncovers that the importance of Piketty’s g is much more important than his r. That would be a worthwhile conclusion to have substantial amounts of empirical evidence supporting it.

        Also consider, this is relatively new information. So even if the likes of LIS and Krugman have liberal agendas, it seems to me they want their findings to hold up under peer scrutiny. That seems to be part of the point of the project, as I understand it. And this is something that should be music to the ears of those that support the “rising tide” argument, because it gives them counterfactuals to work against.

        • Good points. I am pretty certain it was a pay decrease. I personally don’t care how much they pay him. But I think the situation gives people ammo to shoot down all of his claims as being biased. Now he’s the guy who’s being paid a top 5% salary to promote income inequality.

          Don’t get me wrong – I wouldn’t have turned down the money and I don’t think he should have. But that doesn’t mean he doesn’t have the appearance of being somewhat hypocritical and now monetarily and politically biased to promote a view. I mean, this is basically a celebrity endorsement deal. He might have already liked the product, but now he’s going to have to REALLY like it no matter what his actual views are. That doesn’t look good for a political view.

          Personally, I will be more inclined to close the browser now the second I start reading a Krugman piece on inequality because I know what the view is going to be before he even says it. Just like I know to fast forward over a Gatorade commercial with Tiger Woods.

          • Exactly. When a politician gets bought off by a lobbyist we call it corrupt. When an economist does it we call it part of the job description.

          • Organisations promoting the welfare of the ordinary working citizen ought pay the best brains they can afford in the interests of maximising the welfare of those whose interests they are representing.

            Arguments that people ought give up a lot of their realisable income at any time to represent the interests of ordinary people through a progressive think tank are just another way of trying to deprive ordinary folk of the best available representation of their interests.

            It’s like saying that shareholders can have corporate entities which in turn can have personel departments, lawyers and accountants to negotiate wages with individual employees, but individual employees ought not be able to unionise.

            A recent major study concludes that America is an oligarchy where the intersts of the rich and powerful and lobby groups get far more success with their goal than do ordinary Americans. Having someone of Krugman’s stature and knowlede on the side of ordinary peolpe will help redress the balance a bit.

            • Krugman is not the ideal advocate of this view. He is a polarizing figure whose politics are predictably progressive no matter what. I actually think his association with this cause hurts it because half of the people out there will reject it simply because he is now so firmly connected to its success.

              Krugman doesn’t have an ounce of political clout. He lost that a long time ago when he sold out to the NY Times to be their “conscience of a liberal”.

              • “I actually think his association with this cause hurts it because half of the people out there will reject it simply because he is now so firmly connected to its success.”

                It sounds like you’re saying that his work is not to do social science or economics, but to convince the public about political issues.

                And you’re saying that half the public will disagree with anything he says because they assume he’ll take a stand they disagree with.

                That is, the battle lines are drawn and at least half the people will ignore any evidence.

                But if they will discount anything Krugman says because it’s Krugman, if somebody else comes up with similar results won’t tyhey discount them just as much? Once you assume that anything which disagrees with you is politically-motivated lies, it hardly matters who it is that says them.

          • I guess my feeling is — you know what he’d say about it anyways. Krugman is already a fully developed brand, there aren’t really any surprises.

      • It’s pure influence peddling.
        There is a nexus of Ivy Leaguers rotating between government, media and banking and making sure they all get paid.

  4. It probably has to do with the fact that most people don’t own bonds so they don’t have a clue about them. And real estate just doesn’t generate negative returns very often so it feels safe. Even the recent 35% decline in US real estate was meager compared to what people are used to seeing in the US stock market during bear markets.

  5. Housing is a good investment because if you own your home in retirement you’ve saved yourself rent. One way of putting that is that you free up at least half of your Social Security check.
    Also when calculating the capital appreciation value of a house you have to account for the utility of the house.
    Not sure how to do that, but if you rent for 30 years vs. pay a mortgage for 30 years — after 30 years you basically have a free asset.
    Yet another way to look at it — if I went to borrow 200k for a house, I could do it easily. If I wanted to borrow 200k to buy stocks, they would laugh at me. So for most people, buying a house is a way to use leverage in a relatively safe way.

    • A buy/rent analysis is pretty simple. It’s really an opportunity cost analysis. For instance, the biggest problem with purchasing a home is not the costs associated with it, but the cash you’re foregoing that could be invested in some other asset. So, if you put $200K into a home purchase that’s $200K that could be growing at a higher potential rate assuming you invest it. If housing grows at 3% per year and stocks grow at 7% per year then you’re actually smarter if you rent because you’ll actually end up wealthier if you’d paid the rent (this assumes you have a similar mortgage) and invested all the cash you’re foregoing upfront.

      Of course, the figures in all of this can vary. If real estate generates a higher return then this gets flipped. So it turns into a timing bet on real estate or stocks really because the deciding factor is the return you end up generating from each.

      • 200k house grows at 3 pct. Minus let’s say 6k in property taxes and upkeep. So your investment is static.
        vs.
        200k stocks grow at 7 pct. However, minus 12k in rent, which is an escalating cost. So your 200k grows at 1 pct the first year. At 4 pct inflation, your rent is going to be double in less than 20 years.

        But the big factor is that for the typical person, they can buy a 200k house with a loan. I think that’s where the average Joe sees the benefit. If you’re putting 20k down on the house and it grows at 3 pct, you are seeing 30 pct return the first year on your original investment if your house grows at 3 pct and that accelerates due to compounding.

        • Bingo, and there is a non-economic factor that I’m sure many of us get — there is a certain freedom and quality of life to owning a house when compared to renting.

          Make no mistake, that is a matter of preference. I’ve lived on the East Coast, and if I had chosen to stay there, renting long-term would’ve been far more likely, as the access you have to public services and myriad options for private enjoyment in a place like NYC make renting a higher quality life than trying to own an overpriced building in the metro stat area and then having to hell commute.

          But on the other side of the coin, I now live back where I grew up (suburban eastern heartland, I’d call it), and the quality of life is better owning than renting, because the lifestyle here is more conducive to it. Just different strokes, really… but that is where I believe the decision to get a mortgage really comes from. People might say they think their house is an investment, but what they really mean is that it is an “investment” in raising their living standards in the style that they prefer.

      • Buying a house is usually better than investing the difference because most people are so bad at investing the difference.

        • It’s a directional price bet just as all asset purchases are. If housing does better than the rate of inflation then you’ll do well with it. If it goes down 35% then you’re screwed.

          • «It’s a directional price bet just as all asset purchases are. If housing does better than the rate of inflation then you’ll do well with it. If it goes down 35% then you’re screwed.»

            It has some nearly unique “advantages”:

            * As hinted in the quote above, it is almost the only asset class in which ordinary people can invest on margin debt at very high leverage ratios, often reaching twenty times.

            * Capital gains are government sponsored and more than half the voters will fire any government that threatens them.

            * The cost of the margin debt, the mortgage rate, is also government sponsored, and a large plurality of voters will fire any government that does not keep it low.

            * For most speculators the capital gains are entirely tax free, and most voters will fire any government that meddles with that.

            * It is a completely unproductive investement, that is purely redistributive: every capital gain comes 100% at the expense of someone else. In particular it redistributes from poor young whites and blacks to rich older whites.

            * As a result it has returned fabulously high profits, something like 50-60% (simple, not compound) rates tax-free for decades.

            * A large part of the extremely politically influential FIRE industry makes a lot of money providing margin debt to the speculators, and they add their political weight to the votes of the speculators.

            * Since the related margin debt is used as collateral for a colossal amount of borrowing by a large part of the FIRE industry, any capital losses on housing threaten the solvency of the entirely financial infrastructure, adding to the political necessity of ever higher asset prices.

            It can only end badly.

            • ‘Since the related margin debt is used as collateral for a colossal amount of borrowing by a large part of the FIRE industry, any capital losses on housing threaten the solvency of the entirely financial infrastructure, adding to the political necessity of ever higher asset prices.’


              That’s the big one. It almost seems as if our entire monetary system is built upon real estate. All our money is backed by the purported value of buildings. And the easiest way to get money is not to earn it but to lever property.

      • “this assumes you have a similar mortgage”

        where then did the $200K for the stocks come from???

      • But remember you can leverage up in real estate. You can also try little tricks, like renting out rooms, or putting a trailer on the lot and renting that out. Usually you can collect rent in cash

        There are tax considerations.

        There is the one-time sale free of capital gains.

      • You forgot rental fee in your calculation. If the difference in stock versus real estate grow is 4% (7-3), you have to remember that you don’t have to pay rent if you pay the mortgage. 4% of $200,000 is $8000 a year and all this would have to go towards renting. I don’t think you can rent same quality house for $700 a month. So, you will end up with the same gain 3% a year and live in substandard conditions.
        Also investing in stocks carry more risk, require more knowledge, and could be quite stressful.

    • Stocks are really just a share in the equity component of an already leveraged company. Comparing returns on shares ought be done with a house leveraged to say 50% or more.

      There are also lots of returns to homeowners that are not financial: security of tenure, stability for children, consistent schooling for children, building networks in a single neighbourhood, eventually having sufficient equity that you are rent free in retirement or can withstand a period of unemployment or illness, time and money savings of not having to pack up and move every few years at the whim of landlords who sell to an owner occupier, or want to live there themselves, or provide accommodation to a relative or friend, or want vacancy so they can renovate.

  6. Housing can turn out to be a better “investment” in the eye of the beholder mostly because they stuck to the plan! How many people will consistently, come hell or high water, put money into an investment account each and every month for 30 years no matter what? Not as many as you might think and so it usually isn’t a fair comparison in their own experience.

    Secondarily money put into a house is dead money — it doesn’t earn anything. If we both buy a house and I put down 10% and you put down 50% and real estate appreciates 5% for the year, well we both only made 5%. However my leverage is a hell of lot better. Also in the situation wherein one might want to tap home equity, but are now retired and with less income, the lender is liable to laugh in your face.

  7. Real estate depends entirely on the mortgage terms. They don’t call it a “death contract” for no reason. Someone is coming out on the winning end of that contract and it sure as hell isn’t the debtor except maybe in some non-financial sense (like, you have a roof over your head).

  8. There are two components to the buy-rent question. One is financial and the other is quality of life. Since this article (according to the lead) is about most Americans, we should analyze these questions in terms of most Americans.

    First it makes no sense to go on about how the stock market returns 7% and housing 3%. Study after study shows (with varying results but the same general outcome) that investor return is far less than stock market return, hovering around +/- 3% depending on the study. But at least the principal is not at risk. In this sense, comparing housing returns to the stock market is moot.

    Second, a $200K house is a $400K house for these purposes because if the house buyer adds up every check he writes until he receives title free and clear, the total comes to generally around twice the price of the house. This real cost is often neglected in analyses. Of course, we must add on property taxes, insurance and maintenance. It is true property taxes and interest are deductible, but it is not like homeowners recover the total amount. They save only the percentage equal to their tax rate. Many get no tax benefit at all because the total of interest, property tax and other itemized deductions fail to exceed the standard deduction.

    Generally, all financial things considered, renting is cheaper than buying. However, it is nearly impossible to rent a comparable quality house for what the same money will buy. Add in notoriously difficult landlords and no wonder people want their own house. In my town, 95% of rentals have some combination no laundry facilities, no parking or inadequate light. The rent/buy equation is nearly equal, but the difficulty of saving a down payment makes buying an impossibility. Landlords know this and they treat tenants poorly. Tenant who notify landlords of maintenance problems are “troublemaking complainers.” Or landlords restrict the freedom of even proven great tenants who take good care of the property. In my case, refusing to let me raise a guide dog puppy or host an exchange student. Renting for other reasons is an inherently unstable situation. As just one example, the house can be sold out from under you. Quality of life is an important consideration.

    And looking towards retirement, buying a house can be a great idea. Maybe a house appreciates only 3% per year, but it is not paper wealth you hope you can sell in time. It is a real and presently useable asset. People live in their houses. Given that rents tend to increase an average of 5% per year, if you plan to rent for the rest of your life, you will need about twice the retirement savings compared to owning a house.

    The biggest problem I see is that too many “greater fools” pay too much for a house, especially in my town where median house prices are generally 6-8 times median wages, instead of the historical 2-3 times.

    • “Given that rents tend to increase an average of 5% per year, if you plan to rent for the rest of your life, you will need about twice the retirement savings compared to owning a house.”

      Depending on your personal preferences etc, it might work for you to live someplace you hate where you can keep a good job, and then when you retire move to someplace much cheaper where you could not have made much money when you were working. You might prefer to spend your retirement years in Alabama or Mississippi, say. You might find a cheap retirement cottage not all that far from a major hospital.

      That’s true whether you own or rent. One way you sell and hopefully get a lot of money and then for taxes you buy two or three places in Alabama and rent out the extras. The other way you just pick up and move and your rent goes way down, or depending on your savings you might possible choose to buy something whose equivalent you could not have afforded while you were working.

  9. O/T: can anybody get to “Worthwhile Canadian Initiative?” Nick Rowe’s blog? I’ve tried a couple of different networks… seems like their site is down.

      • BTW, a long time ago, one of the MM guys was getting confused between MMT and MR, and somebody corrected him, after which he made a disparaging comment, something like this:

        “Any philosophy that has to include “realism” in its name probably is likely lacking in that very thing.”

        It just occurred to me what the snappy comeback should have been: “What’s that say about “Worthwhile Canadian Initiative” then?” :D

        BTW, it wasn’t Nick Rowe that said that … so I’m not picking on him here.

        • Well, if you reject banking and accounting, as Market Monetarists seem to do, then you might as well ignore any semblance of reality just to remain consistent.
          :-)

  10. Comparing real estate (personal home) to gold, bonds, stocks is interesting. There are three necessities’ in life, food/water, shelter and healthcare. When one gets the three necessities’ covered life gets relatively secure. You don’t need stock, gold, bonds or other selected assets to be financially secure.

    I assume each of us in the conversation needs shelter and the choice with real estate is simple, is it more cost effective to rent or buy? If one is not a saver (like my older brother) buying a personal home can function as a savings account and offer the opportunity to downsize the personal real estate later in life. Poof, there is some cash.

    I paid off my personal home years ago and can say without reservation that owning the roof over your head is not free however I feel that I have achieved freedom. Freedom is all about obligation… or lack of.

  11. This whole discussion about buying a house feels kind of absurd. I bet most of the folks in these comments saying that buying a house is a bad idea financially own houses. And that is the point — some laypeople might say their house is an “investment,” but in reality, they mean it is an investment in their desired quality of life. Even if some people think it is an important financial asset as well, I highly doubt that when faced with the reality that it really isn’t a great financial asset, that they’d say, “Well crap I should’ve rented instead all those years!”

    We own houses because of the additional freedoms they afford us.

    • “I bet most of the folks in these comments saying that buying a house is a bad idea financially own houses.”

      Agreed. But I also bet that a lot of the people here would say that diamonds are a bad investment, and yet their wives have diamond rings. Every one of my wives has agreed that diamonds are a bad investment and so chose plain thick gold rings. That’s the kind of woman I marry. But most men are not so picky….

  12. Fine article and solid comments. Thank you.

    I’d love to have a screen shot of this same article and this same comments section in 2005, back in the days when Cullen was just a gleam in his Daddy’s eye. Seems to me that time is the great equalizer here … the dumb luck to sign a contract prior to a massive housing appreciation (or not) … your arbitrary appearance in a time of low or high interest rates on mortgages … like that. It blows my mind to recall that my first home came with a 13% note, and somehow I’m still somewhat “ahead on my investment.” At the same time, I’m approaching the age when real estate taxes will force me to seek other alternatives. I see it happening all around me. That can’t be a reflection of good investment by any measure, so, for me anyway, I counsel anyone who will listen to not let it enter into the equation.

    A house is a roof overhead for your family, nothing more. You can flip houses, maybe make a few bucks, but that’s like trading options. You better be darn right at the darn right time, and you better call it trading, not investing.

  13. 0.74% average above inflation return is not a bad number at all. 6% Rental income and a leveraged account without margin call, plus 0.74 above inflation capital gain, looks pretty good to me.

  14. I is weird why housing % surprises you. Given the % of average American wealth allocated to housing, I am rather surprised it is so low.

    The really interesting numbers are gold and bonds. I absolutely do not believe the average American has any noticeable % of their net worth allocated to gold! Maybe an old ring or spoon, but nothing besides that. I think this “best long term investment” number is just imaginary.

    With bonds, it is the opposite. I strongly believe absolute majority with any net worth allocated to any investments, has very significant % of it allocated in some obscure fund in their 401Ks.

    So, it probably looks like everybody believes in gold but keeps money in bonds…. Cognitive dissonance???

    • ” I strongly believe absolute majority with any net worth allocated to any investments, has very significant % of it allocated in some obscure fund in their 401Ks.” There are a lot of unexamined and unsubstantiated assumptions in this statement. A lot of people do not have 401(k)s to begin with, even if they might have “any net worth” which they have decided to allocate “to any investments.”

      Here is my story. Maybe it is data, maybe anecdote. Of the hundreds of tax returns I prepare every year, and the hundreds more returns I check, those with bonds are nearly nil. There might be a few bond funds, in or out of 401(k)s, but a bond fund behaves quite differently than a bond itself. Most people do not have enough net worth to afford real bonds.

      • It’s my subjective opinion and I do not have (and do not want to search for) any quantitative proof. So, it is what it is.

        I assume, we agree about good.

        About bonds: bond mutual/etf funds are the same asset class as individual bonds, for the purpose of this review. Those Americans who have brokerage accounts, usually have IRA/401k. Also, many who do not, still probably have defined benefits plans, either government or private. So, based on my little knowledge of the industry, all defined benefits are stuffed with bonds. 401k – see my previous post.

        talking about gold vs bond % as “good LT investments”. Combined market cap of all gold miners is less than total bonds outstanding of couple big telecoms. All ever mined gold market value (not talking about “average American” holdings) is much less than total US issued bonds. And much of this stuff ends up in pension plans of various sorts. What is typical allocation to gold? Below 1%.

        So, the discrepancy between “public” perception of best LT investment (something apparently fit for a pension account) and real allocation is drastic. Except housing.

        • Well, you began with a criterion of “any net worth.” I am just saying that most people with any net worth do not have bonds as far a I can see. Then you change your criterion in your response to people with brokerage accounts. But then it seems you are further refining your criterion to only people with IRA/401(k)/defined benefit plans. Then you suppose what might be in those accounts and draw a conclusion from your supposition,

          I am saying that based on the aggregate thousands of tax returns I have seen, there are very few bonds anywhere. Bonds funds are not the same asset class as bonds because they behave so differently from bonds. They are the same only in so far as so many people seem to believe they are getting what bonds do when they buy a bond fund.

          My data/anecdote is subjective. Your suppositions are thin air. So the conclusion is more a cherished myth than a worthwhile insight. Your response amounts to little more than “I want to believe what I want to believe and I am not interested in facts” I do agree however that I only rarely see anyone with gold. On the other hand, if their gold is physical I would not see it unless it was sold. The sale will generate a reportable (and reported by the gold dealer) transaction. Now a belief of my own. I believe the number of people holding gold id vanishingly small, regardless of the noisy goldbugs..

          • “Bonds funds are not the same asset class as bonds because they behave so differently from bonds”. No, I strongly disagree. They are the same asset class. Defined coupon payments, and return of principal. This is the key difference between bonds and other asset classes.These are the basics. I do not understand why you are arguing with me here. So, if investors own bond funds, they do not own bonds? And if they own stock funds, they do not own stocks? Do you see an asset class “stock funds” or “bond funds” in the survey? Yes, there is a difference between owning a single bond vs portfolio of bonds, as well as single stock vs portfolio of stocks. Yet these differences belong to portfolio theory, not to asset classes definitions.

            Then, the general point. I expressed my subjective opinion, and explicitly stated it is my subjective opinion. You do not have to mention that.

            Your opinion, as you said, is based on “thousands” of tax returns. That, statistically, is a significant number. Do you have 24% of your clients invested in gold and 6% invested in bonds? If no, what are your numbers? What % of your clients have 401ks and DBPs? Are you informed about holdings in those plans? (i, for example, never disclosed my 401k holdings to my tax advisor. My 401k is 70% in bonds. My brokerage account is 15% in bonds). It is really interesting. And, if you provide the numbers, it would not be “thin air”.

            Finally, we both sort of agree the gold holdings are vanishingly small. It seems we disagree on bonds holdings. What would be your estimate then of % of “average American” holding bonds?

            • When people own stock funds, the funds behave exactly as the underlying stocks held in the fund. Owners of bond own debt. Owners of bond funds own a fund whose value fluctuates on the open market like a stock fund.

              Maybe someday I will go through the files and make a composite record of exactly what each client holds. As a modest tax preparer, I have not done that, so I cannot say more than that I do not see many bonds.

  15. Seems investors’ sentiment are simply following the latest developments in the markets.

  16. It’s not the asset class, it’s your skill in the asset class. Real estate can pay off as handsomely as securities, or commodities, or what have you. You just need to hone your skill in the asset class of your liking and beat the competition in terms of knowledge base and skill. Each major asset class has its own strenghts and weaknesses.