In most of the popular financial press you will see daily updates on various stock market indexes. Examples include FT-100 in the UK, the DOW or S&P 500 in the US. Every large exchange has one or more indexes.
Does an index matter?
If people are buying individual shares or even mutual funds how a specific index performs does not correlate very well to how your specific investments have performed in many cases. Misleading but at least we are comparing shares with shares. Unless you are buying an index does the index really tell you how you are doing?
It gets worse…
Financial writers like to compare a stock market index with a House Price Index (HPI). S&P up 11.2% last year while house prices only up 8% is the type of headline you see in January. Skipping over the fact that housing is very local so there is no national average that is representative of what a local market has done, the idea that you can compare the average HPI for a country to a stock market index is completely wrong.
Many stock market investors do think stock indexes are key. They then blindly assume that a national HPI has importance.
The following quote is from a post titled Greenspan and Why We LOVE Commercial Real Estate. The blog is focused on commercial real estate investing in the US. For those not in the US assume commercial may be slightly different in your market plus there are tax code differences. That warning aside consider the points being made:
I Know My Profit When I Buy
When I buy at the right price and execute on my business plan, I know what profit I will make when I buy.
I can pencil out my plan to improve the property, raise the rents, lower expenses and get a pretty good bead on the value of the property given the resulting increase in cash flow.
Predictable Cash Flow Lets Me Rest Easy
When I hold cash flowing commercial real estate I can sleep like a baby – no matter what anyone (including Mr. Greenspan) says. The cash flow depends on things I know about and are pretty darn fixed – rent, mortgage and fixed expenses. And many of them I can improve to drive appreciation of the underlying property in addition to my income.
Leverage Baby, Leverage
I can buy $100 in property for $20 down and it doesn’t even have to be my money.
Just imagine going in to Merrill Lynch with $2000 from one of your investor friends and ask to buy $10,000 of stock. They flat out would not know how to respond.
Yet you can bring $200K of your investor’s cash to a deal and buy a $1M piece of investment property any day of the week.
Name me any other investment that can get you a tax write off year after year – for decades mind you – while it goes UP in value. You have to love depreciation.
The mutual fund world is so perverse you can owe taxes even though the fund lost money that year. Yeah, there’s a safe investment for ya.
A US tax benefit not even mentioned relates to the 1031 deferral rules. You can keep rolling all your profits forward into bigger deals (or multiple deals) and not pay any tax until you cash out. The US government becomes a silent partner. They keep ‘their cash’ (the taxes you will owe later) on the table for you to re-invest. Try that as a stock market investor.