In the last 12 months, our opinion about certain investments has not fundamentally changed. You could call us predictable—but we prefer to say that we are consistent! We also believe in strategies that work in every economy.
A summary of investments and assets we believe can be suitable for some investors:
We like life settlements for asset growth without the roller coaster ride of the stock market. We appreciate the fact that life settlements are completely immune to stock market volatility, interest rate fluctuations, and geopolitical turmoil!
(Unfortunately, life settlement funds are for accredited investors only. Currently that is defined as $1 million in assets (not including home equity) or an income of $200k/year for individuals, $300k/year for couples.)
For cash flow, there are mineral rights leases, bridge loans and real estate equity investments. And for investors age 70 and beyond, single-premium immediate annuities may deliver the biggest (and safest) cash flow bang for the buck. (Contact us to compare annuity rates or other options.)
And for accredited investors looking for a tax-break and an upside potential, there are significant benefits to investing in oil and gas.
Real estate prices are comparatively high right now, but in any market, a solid property with reliable cash flow can be an excellent investment. We use the Truth Concepts Real Estate Analysis calculator to evaluate real estate deals. (There is an option to purchase the Real Estate Analysis, Loan Analysis and Financial calculators for $200 with a $100/year renewal.)
Whole life insurance continues to be the best long-term cash vehicle (as well as an excellent risk management tool). We have recommended this age-old product for decades, use it in our families, and have even written books about life insurance, so it is a product we understand well!
For short-term savings, an internet bank or credit union (something paying more than the anemic rates of the big banks) is a good choice.
Nobody has a crystal ball.
We did not see the run-up of the stock market coming in 2019. (Neither did a lot of billionaires rumored to be heavy on cash right now.) We expected that the bull market could turn around at any moment. After all—this bull market has now surpassed the previously longest bull market in US history by 17 months.
Neither did we predict that interest rates would actually fall in 2019—making it a good year for bonds. Like many, we believed interest rates might continue to tick up!
We don’t use strategies recommended by popular financial advice because our goal is to avoid the unpredictability of interest rates and volatility of the stock market. Our Prosperity Economics philosophy is NOT based on trying to predict or time the market—something money managers prove repeatedly is not easy to do!
Nobody can pick next year’s fastest-growing assets with certainty. However, you can choose assets with more predictable returns. Some private lending opportunities such as mineral rights leases have agreed-upon terms. Growth of the cash value of whole life insurance has minimum guarantees plus a long 100+ year history of additional dividends (not guaranteed).
As far as where NOT to invest in 2020, here are some products and strategies we think most investors will be best-off avoiding.
Exchange-traded funds that track the S&P 500 and other popular indexes are among the most popular investments today. Why not invest in ETFs?
First, we are overdue for a downturn that will likely impact much of the stock market. Given the length of this record-setting bull market, the S & P 500 and other broad indexes are likely to be hit hard. For now, lower interest rates and tax reform seem to be keeping the bears away. But stocks will inevitably head the other direction.
But are ETFs less safe than other stock market strategies? Michael Burry, the real-live hedge fund manager and math savant played by Christian Bale in The Big Short movie, thinks so. In an email interview with Bloomberg News published on Sept 4, 2019, Burry argued that ETFs are the next big bubble. He compared the index funds of today with pre-2008 collateralized debt obligations—the financial instrument that nearly broke the global financial system.
“This is very much like the bubble in synthetic asset-backed CDOs before the Great Financial Crisis… Like most bubbles, the longer it goes on, the worse the crash will be.” Burry maintained that the flows will reverse at some point, and when that happens, “it will be ugly.”
While we have no proof that Burry is right (and some analysts have argued for or against his thesis), it’s hard to argue with his past track record. And given the criticism he received for not warning everyday investors about the subprime meltdown, one wonders if he isn’t trying to redeem himself by sounding the alarm this time. But is anyone listening?
Third, the “smart money” seems to be moving into cash and alternative investments, non-correlated assets and cash rather than hedge funds and equities. Yale’s endowment fund now holds a mere 2.75% in “domestic equity,” says a recent report from the university.
Institutional investors raised allocations to alternative investment strategies to an average of 25% in 2019, says the Ernst & Young’s 2019 Global Alternative Fund Survey. The survey of asset owners and alternative investment managers found that asset owners are redeploying assets from hedge funds to private equity, real estate and other non-traditional strategies. Reported Pension and Investments, “Hedge funds continue to make up the largest percentage of investors’ allocation to alternatives, but they are quickly giving up market share.”
Bonds and bond ETFs.
Typical financial advice says all that a “balanced” portfolio needs is stocks, bonds, and perhaps a smidge of cash. But this typical wisdom comes by way of brokers who get paid almost exclusively for selling—you guessed it—stocks and bonds.
Bonds are not the safe haven they are often thought of. Municipal bonds are no longer reliable, trillions in corporate bond debt has been downgraded by rating agencies, and there are BIG potential problems with bond ETFs. As Hari Krishan of Doherty Advisors explains in this enlightening interview, while bonds are sold as something reliable and conservative, perhaps even stodgy, the truth is anything but.
“All sorts of strategies that you wouldn’t think would be possible in the bond market are now suddenly possible trading the HYG (iShares iBoxx $ High Yield Corp Bond—ed). This is a mistake… this is a very illiquid market. What underpins many of these ETFs, especially In the fixed income space is stuff that doesn’t move. It’s either closely held by pensions, insurance companies and so on, or it’s held by mutual funds that are very vulnerable to outflows. If you operate under the illusion that the ETF is trading like a share, you could be in for a rude awakening.”
Real Estate that Doesn’t Cash Flow
Speculation, future appreciation and gains helped fuel the subprime mortgage debacle, and caused many real estate investors to lose their shirts.
Now in early 2020, we see many similar conditions. Low interest rates have caused prices to push even higher after stalling a year or so ago. Mortgage companies have become more lax about lending, allowing buyers to borrow up to 100% of a property’s value. In some cases, loosely vetted buyers have financed homes that may not stand up to scrutiny.
We believe it’s always a risky idea to buy real estate that doesn’t cash flow, and this is especially true in 2020. Avoid speculation at all costs. Also avoid purchasing properties with cash, as there is generally a large opportunity cost in doing so.
ONLY involve yourself with real estate deals with solid cash flow numbers that you could afford to hang on to if/when the market softens again. (And, of course—your own home, IF it is well within your budget and especially if it saves you money over renting!)
Universal Life Insurance.
In a nutshell: Universal life insurance and IUL (indexed universal life) are often sold as an “all in one” investment that will help people save cash, give them with stock-market-like gains with no downside, and provide them with a permanent death benefit, too. Unfortunately, UL and IUL fall short of promises in every area. And tragically, many seniors are finding that they can no longer afford their policies as they age, since policy costs were not guaranteed and the mortality cost within the policy keeps rising.
There are only three types of life insurance we recommend:
- Cheap term insurance you will have only for a specific time, such as while your children are growing up.
- Convertible term that starts as term insurance but allows for conversion to whole life.
- Whole life insurance. (We sell only convertible term and whole life.)
It’s still true: Cash is King.
In spite of record stock market highs and record holiday retail sales (up 3.4%, according to Reuters), there are signs of serious cracks in the financial system. For instance—something you won’t hear on the evening news—the Federal Reserve has been quietly injecting hundreds of billions of dollars into the Repo market (repurchase agreements, part of the banking/money system).
Then there’s debt. We’re at record levels of U.S. corporate debt—about $10 trillion, a shocking 47% of GDP—reported Fortune last month. And the credit quality of that debt is steadily slipping downward.
According to David Lynch, writing for the Washington Post, the “borrowing binge poses new risks” and could make the next recession “much worse.”
“We are sitting on the top of an unexploded bomb, and we really don’t know what will trigger the explosion,” says Emre Tiftik, a debt specialist at the Institute of International Finance, an industry association.
The bottom line: This is a good time to be cautious. Pay off high interest debt. Save more and keep plenty of cash on hand. Reduce your expenses. Resist speculating. Don’t over-leverage yourself or put all of your eggs into a record high stock market.
If you do all of those things, you will be prepared for anything.
Can we help you invest in 2020? Contact Partners for Prosperity today
—By Kim Butler and Kate Phillips