Should You Hold Most of Your Wealth in Stocks or Homes? One Is a More Powerful Wealth Builder.

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Most of us, unless we're already wealthy, probably want to become wealthy. But many of us aren't sure just how to pull it off. Some folks are buying and holding onto stocks, others are putting their faith (and dollars) in real estate, and some are starting businesses.

Any of those strategies (and/or some others) could work quite well. But it might also be helpful to consider what some experts and studies have to say on the matter.

Image source: Getty Images.

The Fed says...

Let's turn to an authoritative source: the Federal Reserve Bank of St. Louis. On its website in April, it posted some graphs and findings reflecting wealth in America. One finding:

The top 0.1% of households... hold $6.5 trillion in assets, which is more than double the total amount of assets held by the bottom 50% (...$3.1 trillion). These two groups had been much closer in terms of total wealth until they began to diverge in the late 2000s.

This is not news to anyone who has followed reports of growing wealth inequality in America. It's still rather shocking. Imagine it -- a mere tenth of the top 1% of U.S. households has more than twice the wealth of the entire bottom 50% of the population. Jeepers.

Here's another tidbit, and one that's covered far less frequently in the media:

Notice the inverse relationship between level of wealth and share of nonfinancial assets: On average, about 70% of the assets of the least wealthy tend to be their homes and vehicles. Nonfinancial assets become a progressively smaller share of assets as wealth increases and financial assets become more dominant.

In other words, the wealthiest folks in America hold much more of their assets in financial instruments such as stocks, bank accounts, and pensions. Those in the lowest wealth group hold nearly three-quarters of their wealth in homes and vehicles.

It may surprise some people, but real estate isn't the best long-term wealth builder. From 1990 through early 2024, the S&P CoreLogic Case-Shiller U.S. National Home Price Index, which measures residential real estate values, rose by about 323%. On an average annual basis, that's about 4.2% -- roughly half the corresponding average of 8.7% for stocks over that period.

Of course, what the Fed findings don't spell out is that many people simply can't afford to invest in stocks. That is indeed the case for millions. In a 2024 Bank of America Institute report, more than a quarter of survey respondents strongly agreed that they were living paycheck to paycheck, and more than 40% saw themselves doing so to some degree.

It is hard to save and invest in such a situation. Before you can confidently set aside cash that you won't touch for three to five years, it's necessary to be on firm financial footing.

But what if you are able to invest?

What should you do?

The lesson here is not to avoid buying a home -- that can be a lifestyle decision as much as a financial one. But the issue from an investment standpoint is that if much of your net worth is in your house, it's not very liquid. If you have, say, $200,000 in home equity, you'd have to sell your home in order to cash some of that out -- or you'd have to take on debt, perhaps via a home equity loan. Meanwhile, your car's value is likely to shrink, not grow, over time, due to depreciation.

Those owning stocks, on the other hand, are expecting growth in value over the long run -- perhaps along with dividend payments. You don't have to become a stock market expert, figuring out which among many thousands of stocks will be the superstars of tomorrow. Instead, you can just invest in a low-fee, broad-market index fund, such as one that tracks the S&P 500 index of 500 of America's biggest companies.

The S&P 500 has averaged annual gains of close to 10% over long periods -- which is a very respectable growth rate. There's no guarantee that you will earn a 10% average annual gain, though, as the stock market is fairly unpredictable. You might average 8% or 12% or something else over your particular investing period. Here's how your money could grow at an average annual rate of 8%:

Source: Calculations by author.

By saving and investing, you might not end up as wealthy as the top 0.01% of Americans, but as the chart above shows, you can still do pretty well. You just need to have a plan -- and to stick to it through stock market ups and down. Be sure you have a solid retirement plan, too.

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Selena Maranjian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.