“Successful investing involves doing a few things right and avoiding serious mistakes.”
—John Bogle, 1929 to 2019
Last week’s article on “How to Save $20 (or more) Every Day!” spurred an excellent question from a reader… where do you PUT the money you save? Or perhaps you have a windfall and need to decide where to put cash now! Where should you save and invest now for a profitable 2019—without taking on unnecessary risk?
Predictably, media outlets financed by advertising from Wall Street firms such as Kiplinger’s are recommending—surprise! Keep your money in stocks and mutual funds, with perhaps a bond fund and cash equivalent thrown in for good measure.
We don’t have a crystal ball, but we think you can do better than subjecting yourself to the stock market roller coaster. Today, we’re sharing our summary of what to do with a large amount of money and why we think certain asset classes may be a good—or bad—bet.
Three Purposes of Investments
The first thing to do is to determine what you want your investments to DO for you. Most investors are looking for investments or savings vehicles that do one of three things:
- Store CASH for emergencies, opportunities and liquidity.
- GROW your assets effectively.
- Create INCOME that can be reinvested or relied on for living expenses.
A common mistake is trying to get investments to do everything at once. However, if you do this, you’ll get disappointing results. There is also a bit of a logical sequence to optimize your investment results.
If you are just getting started saving and investing, you want to begin with building your cash reserves. You want to build liquidity for emergencies and opportunities—including future investments that may require large lump sums.
The rule to follow is: save before you invest. If you haven’t built up at least a solid emergency fund (3 to 12 months of living expenses, depending on how secure your household income is or what other safety nets you might have), your focus should be on cash. Otherwise, if an emergency or job interruption comes along, you’ll have to liquidate your investments—and pay any fees, penalties, taxes and losses associated with disrupting what was likely intended as a long-term investment.
If you have plenty of liquidity and do not rely on income from your investments, investing for mid-to-long-term growth will likely be your next focus. While this traditionally means stocks, we think there are better options.
If you are retired or nearing retirement say, you want to shift your primary focus to investing for income. (And you don’t need to wait until you are staring retirement in the face—investing for cash flow is a good strategy at any age!)
Let’s look at the three categories one at a time. We’ll start with investing for growth (because it’s the most fun!) In next week’s part two, we’ll look at investing for cash flow and where to store your cash.
Investments for Asset GROWTH
These are assets that you will typically hold mid-to-long term: for a few years or even for decades. You might hold them inside or outside of your 401(k), IRA or other retirement account. Some may be relatively liquid (though the better growth investments may require you to stay invested for several years.
An ideal growth investment is one that produces low double digit growth without risking your principle. (Investments we like don’t always achieve this—but it’s what we aim for!)
STOCKS: Welcome to Volatility Street.
A Wall Street Journal headline summarizes the pain of 2018: “U.S.-Stock Funds Fell 7.7% in 2018 but Foreign Funds Were No Refuge (-15.5%).” Ouch! In another WSJ article, Suzanne McGee writes:
“Most veteran market observers agree that an array of factors, from trade disputes to rising interest rates, will create more turbulence as an aging bull market becomes more vulnerable to emotion-driven selloffs. Adding to the uncertainty is the fact that market strategists… have an array of forecasts for the markets in 2019—both positive and negative… The only point on which everyone seems to agree is that the path ahead will be bumpy.
“…Now, as investors review their asset allocations, they may want to devote some time to considering just where their returns will be coming from and how to manage risk, as well as ponder a switch in strategies or their investment focus.”
While we never recommend holding the bulk of your assets in the market, stocks and mutual funds can be part of a good overall long-term investment plan. But right now in 2019? Stocks are a risky bet.
At the moment, the S&P 500 is poised between September highs and a precipitous December dip. It’s anybody’s guess where it could go next, but several analysts think the corrections we’ve seen are only a prelude to a much bigger crash or bear market around the corner.
While we like to think positively and hope next year will bring a positive return for investors, we think this is a good time to invest in almost anything BUT the stock market.
BONDS: Still not a good bet.
Bonds performed poorly in 2018 as predicted. Since bonds don’t do well when interest rates are rising and rates still seem to be on their way up, it’s not a good time for bonds. The Wall Street Journal laments the loss of appetite for existing or new bonds, recommending investors stay away from all but short term treasury bills (which are more of a cash equivalent than an investment.)
As we wrote in “Are Bonds a Bad Bet in 2018?” even Muni bonds have been underperforming. According to data from Bloomberg reported in Shwab.com (see chart below), municipal bonds delivered a sad 2018 YTD of .8% as of 12/10/18… which was the BEST performance of the various bond categories. In other words, if you want steady, conservative growth, you’re better off in a bank CD or whole life insurance. You’ll likely earn more with far less risk.
Right now, successful investing is all about investing “outside of the box” and re-thinking your asset allocation. Even Wells Fargo strategist Tracie McMillion recently advised, “What you want in your portfolio is something that has its own source of returns that is distinct from stocks or bonds.”
Which leads us to our top pick for investing for growth in 2019…
LIFE SETTLEMENTS: Where Buffet has bet billions!
Life insurance policies and the assets they represent can be bought and sold on the secondary market in much the same way as real estate deeds of trust. The sale of a permanent life insurance policy that is no longer wanted or needed to a third party is called a life settlement or a senior settlement.
Life settlements have been used in institutional investing for decades. Hedge funds, pension funds, corporations such as Berkshire Hathaway, investment banks, and even life insurance companies are big buyers of life settlements. Accredited investors can also participate in life settlements. The easiest way for individuals to invest in life settlements is through life settlement funds, which are private equity funds that purchase many policies.
Life settlements are our top pick for growth because they are non-correlated assets that often deliver returns comparable to the stock market. Life settlements returns are not affected by the stock market, real estate market, interest rates or economic uncertainty. They can be purchased outside or inside of a qualified retirement account (through a self-directed IRA.) Lump sums of $50k or more are required and a commitment of 7-10 years.
HEDGE FUNDS: Still unpredictable and underwhelming.
Just because a type of asset under-performs one year doesn’t mean it won’t do well the next year. But in the case of hedge funds, we are seeing a pattern—and it’s NOT a good one!
A primary purpose of a hedge fund is to balance the risk of the market—to “hedge your bets.” But like the S&P 500, the average hedge fund posted a LOSS for 2018. Reports Market Watch, the average hedge fund fell by 4.09% in 2018, compared with the S&P 500 loss of 4.39 (including dividends). This depressing performance was the first year since 2008 that hedge funds bested the market since 2008, when they fell 19.03% versus a 37% loss for the S&P. Perhaps investors need to hedge their hedge funds?
To be fair, some funds did very well. The world’s largest hedge fund, Ray Dalio’s Bridgewater & Associates’ Pure Alpha fund, posted gains of 14.6 net of fees according to CNBC. However, this impressive performance came on the heels of a measly 1.2% return in 2017, when the S&P 500 returned 21.83%.
Nearly two years ago we looked at the issues in the industry causing the “Hedge Fund Exodus.” Looks like many problems have not been solved, and investors continue to flee.
OIL & GAS: Tax breaks plus potentially profitable returns.
If you wish to (and can afford to) invest in something more speculative, look into investing in oil and gas—not energy stocks, but equity investments or Direct Participation Programs (DPPs). Results can vary from exciting high double digit returns to disappointing returns, even losses, but you will, at the very least, be guaranteed substantial tax benefits.
A DPP typically funds oil and gas development in multiple wells. The first year tax write off can be upwards of 85% of the investment. After about a year, investors start receiving monthly dividends. Within about five years, the wells are typically sold and investors receive their share of the profits.
Investors can also participate in mineral rights leases (land leases), which are an excellent short-term investment for cash flow (but don’t include the same tax breaks as drilling investments).
Learn more about investing in oil and gas in this article: “Is Oil and Gas Still a Good Investment?”
GOLD: A hedge? A currency? An investment?
Gold has been valued for many centuries and can be useful as a hedge to the dollar. Holding some gold is not a bad idea, and if it makes you feel more secure, we recommend buying physical gold. Avoid collecting numismatic coins unless you are an expert.
However, be conscious of gold’s shortcomings as an “investment” for income, growth or a place to store cash. It does not produce cash flow, does not appreciate reliably, and is not readily liquid, being much easier to buy than sell.
For this reason, we caution against selling other assets to stock up on large quantities of gold. Some contrarian narratives hype sensationalist predictions about the collapse of the dollar—and the world as we know it—to motivate readers and listeners into betting everything on gold and silver. If your concern is security and emergency preparation, we think having some cash at home—you know, the green paper stuff in your wallet—will prove much more useful.
CRYPTO-CURRENCIES: Speculation is bad for your wallet—and your nerves!
It can be useful to learn about the block chain and how to use crypto-currencies, which utilize block chain technology. However, stay away from investing in alternative currencies unless you do it with money you are fully prepared to lose! Many alt-coins hyped to be the “next big thing” have gone all but bankrupt. Even Bitcoin has lost more than 81% since its December 2017 high.
Those who got in and out at the right time with the most popular cryptos made a mint, but many are rightfully questioning if they are a fad whose time may have passed. And while a main attraction of crypto-currencies is that they exist outside of the fractional reserve banking system, unfortunately, they share the same problem of fiat currency: they are not backed by real-world value.
More to come…
Next week, we’ll be back with our recommendations—and warnings—for income investments to generate cash flow and the best places to put your cash! Speaking of which… there is one more thing worth noting.
One of the big pluses of mutual funds and index funds is the EASE of investing, which we think attributes to their popularity. No lump sums required… you can put $50/month, $500/month, or a lump sum of $5k into the stock market any time you like. For 2019, if you lack the ability to invest lump sums, it’s a great year to build up CASH or employ some of our income investing ideas. (Stay tuned for next week’s follow-up…)
In the meantime, we invite you to learn more about investing with the 7 Principles of Prosperity™. Download the complimentary resources in our Prosperity Accelerator Pack and you’ll receive an audio and video on the 7 Principles and an ebook outlining our investment philosophy: Financial Planning Has Failed.
If we can assist you with an investment strategy for 2019 or get you more information on any of the recommended investments listed above, send us an email at welcome@Partners4Prosperity, or give us a call at 877-889-3981, ext. 120 (8 to 5 central).