“You’ve got to get the fundamentals down, because otherwise the fancy stuff is not going to work.”
– Randy Pausch, The Last Lecture
“It’s time to hedge!” said a popular financial author a few of weeks ago as the stock market plunged then started a violent roller-coaster ride. But is hedging really the best strategy?
Let’s look at exactly what hedging implies. According to Investopedia.com, the definition of “Hedge” is, “Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.”
A popular phrase is our culture is “hedging your bets” to protect yourself from loss, in case you place a losing bet. You’re betting on two or more horses in case your favorite doesn’t perform as you hope. Dictionary.com expands, “Lessen one’s chance of loss by counterbalancing it with other bets, investments, or the like.”
When investors put money in the stock market they are betting that prices will rise. Hedging is typically betting against the market, often at the same time with the opposite hand.
The Problem with Investment Hedges
Hedging may lower your risk, but it isn’t efficient. It’s an admission that some of your dollars – or perhaps even most of your dollars – will be wasted on a losing bet. Some of your money will be working for you, and then the winning bet has to absorb the lost opportunity cost of the losing bet. (Worse yet, it can encourage financial institutions to bet against themselves… and their investors.)
When you are gambling with your dollars, hedging may come in handy. But why would you want to be making bets with your dollars in the first place? Why not get ALL of your dollars working FOR you? Rather than investing in and hedging against volatile markets, a better alternative is to save and invest in low-risk vehicles with reliable returns and to maximize dollars through strategies that increase efficiency.
It’s time to get back to fundamentals, the fundamentals that existed before the rise of the financial planning industry, and hedging isn’t one of them. Getting back to the basics means saving and investing with time-proven strategies and investments that aren’t based on speculation, but deliver consistent, predictable results.
Our recommended solutions may sound odd or even “risky” to some, but that is only because our preferred strategies are not as familiar as they are not promoted by the big banks and financial corporations that spend billions advertising in the major media. Our focus is on Prosperity Economics – true investment fundamentals and time-tested products and strategies that have preceded the financial planning industry.
Let’s look at how hedging your bets differs from practicing investing fundamentals through Prosperity Economics.
Example #1: Investing for growth in the stock market with stock and hedge fund indexes.
Due to a well-funded advertising campaign, the stock market is now the favorite gambling casino of US investors. For those who aren’t sure if they are feeling “lucky,” there is the option of investing in hedge funds as well as company stocks. After all, surely one will pull up the performance of the other?
Business Insider made a surprising observation two years ago when they analyzed the returns of the S & P 500 and the Credit Suisse Hedge Fund Index in their article on the performance of hedge funds vs. the S & P 500. The article concludes:
“Over the past 20 years however (since the beginning of 1994), hedge funds (at least as determined by the CS HF Index) and the S&P500 performance is nearly identical through Q2 of this year. Both indices are showing about 8.6% in annual returns.”
Whether you were betting on stocks, hedge funds, or a combination of the two, you endured a lot of volatility and drama for a mere 8.6%!
Our favorite growth strategy is not subject to the roller coaster ride of the stock market. Life settlement funds allow investors to participate in the secondary market for life insurance policies. They can invest in funds that have purchased life insurance policies from elderly people who no longer need or want their policies. A recent study by a Harvard professor demonstrated that this asset class has averaged returns of about 12.5% annually.
Most investors have never heard of life settlements, yet they are anything but new. A Supreme Court decision in 1911 ruled that life insurance policies were assets that could be bought and sold much like a deed of trust. Institutional investors began purchasing policies a few decades ago, and now there are funds available to qualified individual investors.
Life settlement funds are not for everyone, but they can be an excellent choice for investors who can afford to put a minimum of $50,000 into an investment for 7-10 years. Find out more about life settlement funds in the article, “Life Settlement Investments, Pros and Cons and Facts” and an episode of The Prosperity Podcast, “An Introduction to Life Settlements.”
Example #2: Hedging the US Dollar with gold.
Some investors who are hedging bets have been buying as much gold as they can, particularly as rumors of the dollar’s demise circulate on the internet (especially on websites selling gold and silver). How has this hedge worked out for those pouring their dollars into gold?
So far, it has been a losing bet. If you bought gold at almost ANY point in the last five years (the exception being about six weeks ago), it has lost value compared to the US Dollar.
Buying gold is pure speculation, as we explore in, “Is Gold a Good Investment,” and you might win or lose. Even if you “win” the bet and gold rises, say, 50% over 5 years, you have to ask yourself:
- Did you buy and will you sell at the right time?
- What was the opportunity cost of buying and holding gold?
- Could you have done better without taking that risk?
- Were you placing a “bet” or were you investing for a predictable return?
Instead of buying and holding gold or anything else on pure speculation, we recommend putting your money to work! One way is to invest in bridge loan funds that provide temporary financing on commercial properties for accredited investors. Bridge loans can generate better returns than our 50%-in-five-years hypothetical example (only an 8.45% annualized return), while delivering cash flow in predictable monthly payments.
If you actually bought gold 5 years ago, you’ve experienced a small loss with no dividends or cash flow. If you purchased gold 3 or 4 years ago, you’ve taken a substantial loss on that bet. You’ve also lost control of the dollars you used to purchase the gold and the opportunity to do something else with those dollars, while wasting time watching gold prices.
Perhaps bridge loans sound “risky” because everyone else is buying stocks, bonds and commodities. But historically, which is the sounder strategy? Notice if banks are more likely to lend money against A) real estate or B) purchases of stocks and commodities. Of course, real property and speculative investments are viewed quite differently by lending institutions.
It’s true that bridge loans CAN be risky if you are making loans yourself and are not savvy about who to work with and how to protect your principle! We only work with companies with a proven track record of managing bridge loan portfolios with many protection for investors’ dollars. (One of our bridge loan providers pays YOU directly and your contract is with them, NOT the borrower.)
Our marketing writer, Kate, discovered that her grandfather got out of stocks and into bridge loan contracts after substantial losses in stocks during the Great Depression. It turns out that her family had enjoyed cash flow from bridge loans for decades! And as her mother relates, “Your grandfather lost a lot of money in the stock market, but he NEVER LOST A DIME investing in the bridge loans.”
A third example would be hedging with cash, and we’ll explore how to do that more efficiently in a future article.
Investing for Success with Prosperity Economics
It is ironic that Partners for Prosperity is seen as doing something “new and different” because our investment recommendations are not driven by the typical stock-market-based financial planning strategies which carry greater risks. Prosperity Economics represents a return to proven ways of saving and investing. As we explain in our book, Financial Planning Has Failed, the financial planning industry has been more successful at creating a false sense of security than creating actual financial security.
Get your copy of Financial Planning Has Failed for free as part of our Prosperity Accelerator Pack today. You’ll also receive a video and a digital audio on The 7 Principles of Prosperity™ and additional valuable articles and podcast episodes delivered straight to your email inbox. You’ll get an overview of Prosperity Economics solutions that can protect you against taking unnecessary risks in the first place.