You often hear people in their 60s, 70s and even 80s say that the house they lived in for 30 years was the best investment they ever made. Given what we recently went through in the housing market that can be hard to believe. But they're probably right; it's just not for the reason you think.
For the last 120 years, housing prices barely kept pace with inflation. The last 30 years haven't been any better, once you include the ugly numbers from the last recession. So how could an asset that barely kept pace with inflation be the best investment someone ever made?
Let's start with how we used to look at houses. After World War II, the United States saw a huge increase in home ownership. From 1940 to 1960 home ownership increased from 43 percent to 62 percent of Americans.
You know these people. For some of you, they were your parents, and for others, they were your grandparents. You went there for Thanksgiving and other holidays. These houses were homes, not investments. Nobody thought about what they were worth every day, month or even decade. You just lived there.
But no more. It's almost gotten to the point where I expect to see a quote for my home on Yahoo! Finance every morning. The website Zillow has come pretty close to being able to provide that.
A few years ago, investing in real estate, including the house you lived in, became America's favorite spectator sport, with most of us either joining in or wishing we could. If you look again at the chart of home values over the years that I linked to above, it looks just as scary and volatile as the stock market.
But in the past, no one knew they were supposed to be scared while they lived in their house. The only time you cared about the real estate market, such as it was, was when you needed to move.
So part of the reason people who lived in the same house for 30 years claim their home was their best investment comes from it probably being the only investment they actually held for 30 years. The power of compound interest, even if the return is just over inflation, is amazing, but only if you actually let it compound.
For comparison, look at stock mutual funds, which are meant to be held for a long time but often are not. According to the research firm Dalbar, the average investor holds on to their mutual fund for just over three years.
Three years versus 30 years may go a long way to explaining why people may say that their home has been their best investment. It's not because real estate has delivered a fantastic return; it's simply because of the decision they made to sit tight in that four-bedroom asset.
So in the end this consideration of the best investment isn't about the relative merits of real estate. It's about behavior. The question to ask yourself, then, is this: 30 years from now, what will be your best investment?