Would You Rather Buy a Land or A Portfolio of Stocks and Bonds?

If you had IDR 500 mio to invest, would you rather buy a land or a portfolio of stocks and bonds?

When speaking with our clients and prospects, I am often asked why they should invest their money in public markets like stocks and bonds, as opposed to land or their business. It’s a good question and I would like to take this opportunity to explain my deductive reasoning.

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Investing is a relative sport. People have different goals, risk appetite, and sums to invest - and therefore, there is not a one-size fits all approach. Of course, if an individual has more to invest, they definitely should have a diversified portfolio of public market assets, and also alternative assets like land or real estate, businesses or even crypto!

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As a retail investor, what options do I have? There are various types of asset classes and instruments available for retail investors in Indonesia. To list a few, investors can directly buy: stocks, bonds, time deposits, gold, land, businesses (whether creating or investing), Crypto, P2P lending, to name a few.

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Among all of the options available, the most optimal place to start investing for retail investors are public market assets like stocks and government bonds vs. illiquid assets like land. Here’s why:

• Accessible - Nominal price of a share in a company can be small.  For example, one share in BBCA is ~IDR 9,000*. A piece of land, depending on where and how big can be quite expensive.
  
  
• Liquidity - In general, stocks and bonds are liquid. That means at any time, investors can sell their stocks and government bonds. Land, on the other hand, is relatively illiquid. It can take months or even years to find willing buyers and settle the paperwork for a prime real estate.
  
  
• Size and Depth - The stock and bond markets are large and deep. Whether investors are investing IDR 100 mio and IDR 10 bio into i.e. BBCA, investors are able to deploy efficiently. In the case of real estate, IDR 100 mio and IDR 10 bio gets you a very different type and class of real estate.
  
  
• Diversification - There is a big basket of listed stocks and bonds to choose from. So instead of getting exposure to one company such as BBCA, investors can build a well-diversified portfolio of stocks and bonds at a relative amount - say IDR 100 mio.
  
  
• Regulated and Secure - Your funds and ownership of the securities you own are safe, secure and appropriately governed (assuming you are onboarded with an OJK-licensed securities brokerage). For full disclosure, this is different from gaining or losing money on the assets or securities you are invested in. On the other hand, the process and paperwork involved when buying land in Indonesia is lengthy, cumbersome and may carry added risks.
  
  
• Historical data - the stock and bond markets have been around for many, many decades. As a result, there is rich data for us to understand the behavior of each asset class. I’m not sure we can say about any piece of real estate.
  
  
• Cost of transaction - the cost when buying or selling a stock or bond is relatively low, and the process is frictionless. For example, when selling  a stock, the all-in costs are ~0.15-0.30% (depending on your broker) where the administrative and settlement processes are seamlessly done by your securities brokerage.  Meanwhile, transaction and administrative costs when selling land can be high and cumbersome. The seller has to hire a notary, property agent, pay tax, renovations if any, and it all takes time.
  
  
• Underlying quality of assets - stocks represent ownership in a company. For example, these can be companies that produce the clothes you’re wearing or the coffee you’re sipping. While there are publicly listed companies that are better than others, there are many other forms of ‘investment’ other with no quality to their underlying assets.
  
  
• Income - Income or yield is commonly overlooked when investing. Like how certain types of real estate produce rental yield, there are stocks that generate dividends and are tradeoffs investors ought to consider - especially when trying to beat inflation. To get to the point where your real estate generates rental yield takes time, and is dependent on many immovable factors. Meanwhile, there are assets like Gold, which is commonly seen as a safe-haven asset where prices are stable but do not generate income.

As mentioned, investing is a relative sport. It’s important to understand trade-offs between one form of investment over another. Beyond returns, investors need to think about the likes of liquidity, and diversification. 

Beating Inflation. For many investors their first objective is to beat inflation, which begs the question: have the asset classes we’ve mentioned previously beat inflation? As shown in the figure below, over a 10-Year horizon, Bonds have beaten inflation while Stocks were on par with inflation. However, the most striking observation is that Gold and Property have performed below inflation, and therefore generated negative real returns.

So let me flip over the question to you: would you rather buy a plot of land, or a portfolio of stocks and bonds if you had IDR 500 mio to invest? (no right answers)

P.S. Buying a basket of stocks and bonds to create a well-diversified investment portfolio is not easy. In fact, it’s a full time job for many professionals to optimize portfolios every day. That’s why I’m a fan of mutual funds or reksa dana as I’ve written a few times before. By investing in a mutual fund, you get instant access to expertly managed portfolios of stocks and bonds without the hassle. 

See you on Simpan soon!

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*Price accurate as of May 24, 2023.

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