• Historical Analysis Example: Comparing Sharpe Ratios
• What Is the Sharpe Ratio?
• Are Corporate Bonds Worth the Risk?
• Government Bonds vs Corporate Bonds
• The Strategic Bond Investor: Strategies and Tools to Unlock the Power of the Bond Market
• Investing in Bonds Series:
  • Part 1, Part 2, Part 3, and Part 4

I think that most people underestimate the cost of buying, owning, and maintaining a home and fail to factor those sizable costs into their total return calculations. Add in your time, the headaches and the stress that owning real estate can cause, and it’s hard for me to make a good case for this asset class.

My wife is well aware of my feelings about real estate, and not too long ago, she decided to dig a little deeper. She has some really good friends who invest primarily in real estate, and they often share with her what a great investment it’s been.

So great, in fact, that they’re actively trying to save more money just to buy more properties. What am I missing? She asked.

Why do you think it’s such a bad investment when others I know say it’s the best investment they’ve ever made? Hearing it phrased that way, bad investment, just struck a different chord that day. And rather than defending my position with charts and data, I found myself reconsidering the question entirely.

So in today’s episode, I’m talking about how to evaluate investments in the real world, what separates a good investment from a bad one, and why some popular performance metrics can be misleading.

If you’ve ever wondered why an investment that looks great on paper just doesn’t feel right, or why others swear by strategies you would never touch, this episode will give you a clearer framework for thinking about your own portfolio.

Welcome to another episode of the Stay Wealthy Retirement Show. I’m your host, Taylor Schulte, and every week, I tackle the most important financial topics to help you stay wealthy in retirement. And now, on to the episode.

The Best Investment for Your Retirement (It’s Not What You Think)

One of the most underappreciated benefits of real estate is that it’s illiquid. You can’t pull out your phone and sell your house with a few swipes the way you can with stocks and bonds. At least not yet.

Buying and selling real estate also comes with significant transaction costs. There’s no Fidelity, Schwab or E-Trade offering commission-free home purchases. There are also meaningful tax considerations.

For example, if your primary residence appreciates in value, you can exclude up to $500,000 of capital gains when you sell $250,000 if you’re single, but you must have owned and lived in the home for at least two of the five years prior to the sale.

For those reasons and many others, real estate incentivizes long-term ownership, and that’s a huge benefit because historically, long-term investors tend to have better outcomes than short-term investors. Consider Warren Buffett.

He did not become a billionaire until age 56. Perhaps even more remarkable, roughly 99% of his net worth was built after his 50th birthday. His investing success was not due to cleverness or constant trading activity.

It was largely due to patience, conviction, and the emotional discipline to stick with the philosophy long after the excitement wore off.

Buffett is widely regarded as one of the most successful investors in history because he committed to an approach he deeply believed in and he stuck with it. He didn’t chase fads, he didn’t jump from one hot stock to another.

His strategy was remarkably simple. Buy high-quality businesses at attractive valuations and hold them for very long periods of time. A great example is Coca-Cola, which Buffett began buying in 1988 through his company Berkshire Hathaway.

As of late 2025, Berkshire’s stake was estimated to be worth over $28 billion, representing nearly 10% of Coca-Cola’s outstanding stock. That kind of result was not driven by luck or constant tinkering, it was driven by commitment.

And here’s the thing, real estate, for all of its flaws, has a built-in mechanism that forces many investors to behave more like Buffett whether they realize it or not.

When you can’t easily sell, when there are significant costs for getting out, when the tax code rewards you for staying put, you’re far more likely to hold through the volatility. You’re far more likely to let time do what time does, which is exactly the kind of patience that built Buffett’s fortune.

That day, when my wife brought up real estate investing and asked me why I thought it was such a bad investment, I was reminded of one of my favorite investing quotes, one that I’ve shared a dozen times here on the show, that the best investment or the best investment philosophy is the one that you can stick with. And the definition of the best investment is, of course, subjective. It’s personal, it’s situational, and it’s unique to each investor.

For example, despite everything I’ve said so far, and contrary to what you might be thinking, my wife and I do own real estate. We own a beautiful home and a nice neighborhood, and it represents a fairly large percentage of our net worth.

If you said that we’re real estate investors, I could not argue with you. But we didn’t buy our home because we believe it offers the highest expected return on our money.

We made this investment because it provides our family with stability, it gives our kids access to some of the best public schools in the county, we’re close to our family, and we don’t have to live with the risk of a landlord deciding to sell the property and forcing us to relocate with three kids and a dog at exactly the wrong time. For us, those somewhat hidden or intangible benefits matter. They matter a lot. They make our home a great investment for us.

And while a simple, low-cost, global market fund has delivered superior returns, and I believe will continue to provide higher returns over the next decade and beyond, our home delivers a return on life that’s far more valuable to us right now.

Contrary to what we might tell ourselves, our friends, or even our spouses, I would argue that most investors are not actually focused on achieving the highest possible rate of return when they evaluate and choose investments.

They may say they are, they may even believe they are, but in reality, other considerations almost always matter just as much, if not more. Take my wife’s friends she referenced to invest heavily in real estate. It’s very possible that maximizing returns is not their primary motivation at all, even if that’s how they talk about it.

They likely have other reasons for investing in that asset class, even if those reasons aren’t spelled out in a formal financial plan or written into an investment policy statement. For some of them, their reason might be familiarity and comfort.

It’s hard to feel confident and have Warren Buffett style patience when investing in something you can’t see or don’t understand. Real estate is tangible. You can see it, touch it, walk through it.

That physicality can create a sense of control and certainty that stocks, bonds and mutual funds simply don’t offer for many people. And that comfort and confidence matters, especially when markets get volatile.

So with that in mind, an important question to ask might be, what sort of price tag or premium would you place on feeling comfortable with how and where your money is invested? Because for many investors, they’re already paying that premium, they just don’t realize it. Now for others, real estate may serve a lifestyle goal.

For example, they might enjoy owning properties in different parts of the country because they don’t want to live in one place 365 days a year.

They may place significant value on flexibility and the ability to spend extended time in different cities, climates or communities while staying in a property they own rather than renting or relying on hotels.

In that case, the investment return is only part of the equation. The lifestyle benefit is just as important.

And then there’s the third group, people who do treat real estate as something closer to a job or a business where buying and selling properties is purely about maximizing returns.

You can absolutely earn competitive and in some cases exceptional returns in real estate. But like most things in life, it’s not passive and it’s rarely simple.

Let’s be honest, the average homeowner does not have the time, skill set or desire to consistently find attractive properties, negotiate favorable terms, manage renovations, oversee tenants, handle maintenance and control costs on a complex, expensive, illiquid asset. You can’t simply just buy a house, hire a property manager, sit back and expect to clip 10% year after year with little to no effort.

But if you enjoy that work, if real estate is your passion, if you’ve developed the skills, built the systems and you’re willing to dedicate the time and energy, yes, it’s very possible to earn above average returns.

However, in that scenario, I would argue that real estate isn’t just an investment. It’s a business that involves risk and skill, and it requires you to be an active participant. And that’s an important distinction.

Too often, we get stuck talking about the best investments too literally. We reduce the conversation to performance charts, average returns and rankings. And I’ll be the first to admit, I fall into that trap too.

But in the real world, investors are constantly balancing returns against comfort, control, effort, lifestyle and peace of mind. While those trade-offs don’t show up neatly in a spreadsheet, they absolutely influence behavior and outcomes, and that’s where things start to get interesting.

Because if investing decisions are shaped by more than just numbers on a spreadsheet, how exactly might someone define a good investment? What really separates a good investment from a great one?

The answer is, of course, unique to each person. Some might say that the best investment is the one that has delivered the highest historical returns. And at first glance, that might seem reasonable. But we all know the disclaimer by heart. Past performance does not guarantee future results. Historical returns can be one helpful data point when evaluating an investment.

They tell us something about how an investment behaved in the past, but on their own, they’re incomplete. And if we rely on them too heavily, they can lead us in the wrong direction.

For example, one major limitation is that performance by itself does not tell us anything about risk. In other words, an investment might have produced the highest historical return, but what did an investor have to endure to earn that return?

How volatile was it? How deep were the drawdowns? How often did it experience long stretches of underperformance? Taking those questions into consideration, we might then find ourselves defining the best investment by the one that has had the best or is expected to have the best risk-adjusted returns.

In other words, how much return did an investment deliver for the amount of risk taken? That’s a meaningful improvement.

Risk-adjusted returns recognize that earning 8% with relatively low volatility is very different from earning 8% with wild swings and stomach-churning drawdowns. And this is where popular financial metrics like the Sharpe ratio can come into play.

The Sharpe ratio is commonly used to evaluate the relative risk-adjusted performance of an investment or a portfolio. And to keep things extra simple today, in general, the higher the Sharpe ratio, the better.

A higher Sharpe ratio suggests that an investment delivered more return per unit of risk than an alternative.

While the Sharpe ratio can be useful, and while it’s certainly an improvement over looking at returns alone, it still has limitations, and those limitations can lead someone to misidentify what the best investment really is, especially when we’re making decisions that need to hold up in the real world, not just on paper.

For example, using a consistent 3-month T-bill rate as the risk-free benchmark, let’s look at 3 different funds and their Sharpe ratios from January 1st, 2000 through December 31st, 2025. Fund number 1 had a Sharpe ratio of 0.52. Fund number 2 had a Sharpe ratio of 0.46. And fund number 3 had a Sharpe ratio of 0.44.

Based on what we’ve just talked about, a novice investor using the Sharpe ratio to identify the investment with the best risk-adjusted return might immediately conclude that fund number 1 is the best investment.

After all, it has the highest Sharpe ratio. But now let’s pull back the curtain and look at what these funds actually are, along with a few other performance metrics over that same time period.

1.) The first fund, the one with the highest Sharpe ratio is the Fidelity Investment Grade Bond Fund. Since 2000, it has experienced roughly a 4% standard deviation, a measure of risk and volatility, and it’s produced about a 4.5% annualized return.

2.) Fund number 2 is the iShares S&P 500 Index Fund, SPY. Over that same time period, it had closer to a 15% standard deviation and delivered roughly an 8% annualized return.

3.) And then, fund number 3, the one with the lowest SHARP ratio, is the Dimensional US Small Cap Fund, which experienced a 20% standard deviation and an annualized return of 9.2%.

Now, these are 3 very different types of funds, 2 stock funds and 1 bond fund, so this is not an apples to apples comparison, but I’m using this overly simplified example deliberately to show you how a metric like SHARP can point you to the smoothest ride, not necessarily the best path to your goals.

So if we rely solely on the SHARP ratio, the Fidelity Bond Fund looks like the clear winner, but its smoother, lower volatility profile coincided with meaningfully lower long-term returns than the other 2 funds. If we put some dollar figures to this, the smoothest ride, the Fidelity Bond Fund, turned $10,000 into $29,000 during this 26-year time period measured.

The S&P 500 Fund, SPY, ended the period with $73,000, and the bumpiest ride out of all 3, the Small Cap Fund, ended with nearly $100,000. Low volatility and low risk can be a very good thing if your primary goal is capital preservation, income stability, or minimizing short-term fluctuations.

But those same characteristics can be a disadvantage if your goal is long-term growth, purchasing power, or building wealth over decades. The Sharpe Ratio doesn’t know or even care what your goals are.

It simply treats more ups and downs as bad even if taking on some extra ups and downs might actually be the right move for you. And that’s why measuring risk-adjusted returns in isolation across different asset classes can be misleading.

The metric isn’t wrong, it’s just incomplete. It tells us which investment had the smoothest ride relative to its returns. It does not tell us whether that ride actually gets you where you’re trying to go.

And this leads nicely into the other common mistake investors make, evaluating individual investments in isolation. If you type the best investment into Google, you’ll find thousands of articles confidently declaring what the best investment is.

Depending on who’s riding, the answer might be Treasury bills, high dividend stocks, the MAG-7, private real estate, crypto, or something else entirely. The problem isn’t that those assets are inherently good or bad, the problem is that none of them exist in a vacuum.

Rather than evaluating investments one by one, I would argue that it’s far more prudent and far more useful for investors to evaluate how investments behave together inside a globally diversified portfolio.

Looking at the portfolio level also helps you use metrics like the Sharpe ratio more intelligently as a tool to better evaluate and potentially improve risk-adjusted returns.

Instead of comparing the statistics of Fund A to Fund B in isolation, it’s more prudent and more effective to compare Portfolio A to Portfolio B and ask which overall mix is more likely to get you to your goals.

Revisiting a simple example I’ve discussed at length in prior bond investing episodes, if you compare corporate bonds to government bonds in isolation, you might reasonably conclude that corporate bonds are the better investment because they’ve experienced higher historical returns. But once you evaluate each of these two asset classes as part of a diversified portfolio containing global stocks, the conclusion changes.

Historically, government bonds have provided more protection during catastrophic time periods, reducing volatility, improving diversification and helping to improve total portfolio returns when riskier assets struggle.

If you want to learn more about this specific topic, I’ll share a few resources in the show notes for this episode, which can be found by going to ustaywealthy.com/268.

Another major benefit of evaluating investments at the portfolio level instead of in isolation is that diversification can meaningfully reduce what’s known as the behavior gap. Put simply, a well-diversified portfolio tends to be easier for investors to stick with for long periods of time.

If you own a single investment that’s too volatile and doesn’t clearly complement your other investments, you may discover, usually at the worst possible time, you may discover that you don’t actually have the stomach to hold through the ups and downs required to earn those higher long-term returns. On the other hand, if you choose investments that feel too conservative, you may start to feel like you’re constantly missing out.

And that frustration can lead you to abandon your plan and chase something riskier at exactly the wrong moment.

This is the primary reason I often advocate for including assets like small-cap stocks, value stocks, international stocks, and high-quality government bonds as part of a diversified portfolio for those nearing retirement or already in it.

Not necessarily because an investor is magically guaranteed to capture the highest returns during their investment time horizon, but because of the diversification benefits a properly constructed portfolio provides and the behavior it encourages.

When you’re relying on your portfolio to produce a paycheck, you don’t want everything moving in the same direction at the same time. Most people simply can’t afford or emotionally tolerate a decade-long stretch of poor returns like US stocks experienced from 2000 through 2009.

And even fewer people would have had the discipline to stay fully invested through something like that without a thoughtfully constructed portfolio.

There’s also a story that’s been widely circulated but never formally confirmed that Fidelity once analyzed all of the investment accounts on their platform to see which ones had the best long-term performance and why.

The conclusion, allegedly, was that the best performing accounts belonged to people who had either forgotten they had them or they were deceased. Whether the story is perfectly accurate or not, the lesson still holds. The best investment does not exist.

The best investment or the best investment portfolio is the one that you can stick with, even if sticking with it means you barely think about it at all. And just as importantly, the best investment is the one that aligns with you, your goals, your values, your time horizon and your needs.

Through this conversation with my wife and through the process of preparing this episode, I’ve realized that I sometimes paint with too broad of a brush when sharing my opinions about different asset classes and different investments.

Real estate is not a bad investment. Setting our primary home aside, I personally don’t believe that real estate is a good investment for us, for our goals, and our investment philosophy.

But it can absolutely be a great investment for someone else for a plethora of different reasons. So, before we part ways today, I’ll leave you with a few questions to consider asking yourself. How do you evaluate your portfolio?

What separates a good investment from a bad one in your eyes? And what investments do you own that might look bad on paper, but serve an important personal purpose in your life? I’d love to hear your thoughts.

You can email me anytime at podcast@youstaywealthy.com and let me know what resonated or where you see things differently. Thank you as always for listening.

And once again, to view the research and resources supporting this episode, just head over to youstaywealthy.com/268.

Disclaimer

This podcast is for informational and entertainment purposes only, and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.