Photo by *Susie*

Supposed Mr. Tan does not invest in an apartment. Instead, he invest his downpayment of $124,000 and 2 years worth housing installment of $66, 0192 into a diversified portfolio of stocks, with an investment horizon of 20 years. I am assuming here that he has prudently set aside about $190,000 before purchasing the apartment.

In the earlier example, Mr. Tan obtained a gain of $1,193,807 at the end of 20 years. Hence, to be equally wealthy at the end of 20 years, what is the return of his stocks portfolio he must achieve (compounded annually) before he can be indifferent in purchasing the property or investing in the portfolio of stocks?

Using a financial calculator, (PV= $190,000, N=20, FV= 1,383,807), the required return of the portfolio is 10.44%.

Hence, if Mr. Tan is not confident that his stock portfolio can give a return of 10.44% annually, he will be much better off if he invests in the property and earn 3.33% return annually.

In fact, even if Mr. Tan can only sell his property for $700,000 at the end of 20 years, his stock portfolio must return an annualized gain of 6.93% for him to be equally well off. Read more…