What's the better investment, and why? Purchasing real estate or investing in the market?
The simple and short answer is 'Yes!'. . .but, like Jethro says, each person has to decide what "works" for them and discard the rest.
I have some money in the market via mutual funds and mostly wrapped up in a 401K. It's there for the long haul. It does it's thing. It goes up, it goes down and it is largely out of my control. The beauty of the 401K, at least in my case, is that I get a match - in other words free money, up to a point. Can't pass that up. Obviously, if I thought real estate was a better use of that money, I would not have put it in to begin with. Conversely, just because I have money in the market, doesn't mean that it's a better use than in real estate.
I have some money as cash in the bank in ING Direct where I dump extra cash until I need it for an opportunity that pops up (could be commercial real esate, could be a start up business, could be to buy an existing business, could be to buy residential real esate, could be to buy an item or items to flip -- if I knew what the purchase was, I would have already spent it)
I have some money spent as a down payment on my personal residence.
I have some money spent as a down payment on 2 vastly different businesses.
I have some money spent as a down payment on 2 vastly different single-tenant commercial buildings.
I have some money spent as a down payment on 3 duplexes, 2 patio homes, and 4 condominiums, with each grouping of properties in vastly different neighborhoods (location-wise, not quality-wise).
What's important to note is that I never set out intentionally to buy any of the things listed. They just came along and fit within my life experience, knowledge, risk tolerance, geography, skillset, and desire. The diversification came naturally.
Of the various investments I've listed, the best one is one of the businesses. However, I would have never been able to purchase the business without having puchased my way up the cheaper properties and established a track-record and equity growth. Addtionally, I'd be a nervous wreck had I dumped all my eggs into that businesses basket as it would put me in a sink or swim position and that's beyond my risk tolerance.
What's are some of the optimal strategies for each?
In every purchase I've made, every one has an exit strategy. Actually, it's not so much a strategy, it's a wide open door that I can step through if any one of these investments started to strain me. Think of it like a new car. Many people take an old car with negative equity of say, $5,000 and buy a new $30,000 car and they'll roll the negative equity in as well as the tag and tax and walk out of the dealer with a $37,000 note on a car that's now worth $27,000 and falling and put the note on 7 years. There is no exit strategy for that car. If the payments become too burdensome they have no choice other than to default on the note. Compare that to someone who buys a $30,000 car and puts $6,000 down and puts the note on a 3 or 4 year schedule. There is no time during that amortization of the note where the owner is upside down with negative equity. At any time, in dire straights, the owner will owe less than the car is worth and can sell it, even at wholesale and get out from under the note and walk away with clean hands. So too are my businessess and properties.
So, for me, the optimal strategy is to intentionally keep yourself in a position that if you HAD to fire sale an asset you can without leaving any debt on the table. The best way to ensure this strategy is with the use of a down payment. A side effect is that it's pretty easy to get bank loans as banks tend to strongly agree with this strategy
As for an optimal market investing strategy? Who on earth knows. Surely some people can demonstrate what would have been an optimal strategy over the last 20 years, but I'd bet a dollar to a dime that that strategy would not be optimal for the next 20 years. One widely touted (and probably the most sound) is auto-investing the same amount every period non-stop. Optimal? Maybe or maybe not. But it does seem to smooth out the ride. That being said, I've recently discontinued my 401K contributions because the market is so high. I'm going to wait for the correction or dive or whatever you want to call it and then catch-up my contributions. Maybe that strategy is bad, maybe not. But the risk involved is minimized by all my other investment activities (the risk being that DJIA @ 13,000 is the new "bottom", which I don't see as being a great risk. I think the market is more likely to approach 10,000 than to bottom out at 13,000 or even 12,000 - but that's a chance I'm willing to take).
What do you need to know for either vehicle?
Ugh. Too hard to answer. What do you need to know to do Algebra?