Friday, July 01, 2011

Where not to invest your money

From David Leonhardt, via Greg Mankiw:
The Hamilton Project, a research group in Washington, has just finished a comparison of college with other investments. It found that college tuition in recent decades has delivered an inflation-adjusted annual return of more than 15 percent. For stocks, the historical return is 7 percent. For real estate, it’s less than 1 percent.


  1. David, Is this post mean not to invest in such property?

  2. I think this is comparing apples to oranges. I can sell my house, even at a loss, and get some money. Likewise for most stocks. But what can I get for my $160,000 BA in "Classics" from NYU? The only way to realize profit on the education is to work. The selection bias on those studies is ridiculous--many people who go to college are already ambitious. What if they were to not go to college and instead enter the workforce directly? I'm not confident that ambitious people with a four year head start would do so much worse. Education is overpriced in the US, and similar to housing, the Feds are encouraging this bubble--making more and more financing available for students to hand over to universities that use the money to build climbing walls and fancy dorms.

  3. If you look at CURRENT prices of college tuition to CURRENT average wages, the return is MUCH worse, unless you expect WAGE inflation to occur (it hasn't) and employment to return (it won't) especially when you consider that financing college at interest and going to college WHILE NOT WORKING and the net present value of that money you save which could be invested elsewhere. On the other hand, one could argue that you could take out school loans and live at home rather than in campus, and find a dividend paying stock that yields enough to more than pay for the interest once you finally have to start paying the loan, or use student loans to pay for a place nearby campus which you can live at a low interest payment and room with a couple of friends that pay you enough rent to cover your payment.