Are you one of the millions of people who lost money over the past decade in stocks and housing who is now buying bonds, annuities, and other fixed deposit credit based investments? If so you are probably doing so because you think it is the conservative thing to do but, in fact, you are really being a speculator buying an asset far above its intrinsic value with the idea that someone else will pay even more and such action is guaranteed to disappoint. Instead, you should make alternative investments the core of your portfolio.
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While there isn’t enough room for everyone to exit bond and equity markets, alternative investments will – if managed correctly – offer sustainable cash flow much higher than what banks or governments are willing to provide. This is especially important for people who are entering or already in retirement and need some stable income to live off of, as well as capital preservation. Below are five suggestions, in no particular order:
Gold and Silver – Alternative Investment #1
Ironically the biggest argument Wall Street and the mainstream media will use against precious metals is that they don’t pay a yield and can’t provide cash flow like bonds can. Now that yields are zero for all practical purposes, that reasoning vanishes. There is no longer an opportunity cost of owning precious metals over bonds or cash. Most importantly, real interest rates are negative, and as long as they are gold and silver will have a powerful wind at their backs. Precious metals can be included in the cash and insurance portion of an allocation, and miners can be included in the equity portion. In addition to rising every single year over the last decade and appreciating at an annual rate of 18 percent gold has, as I wrote in my last article, the makings of attaining $5,000 at its parabolic peak in the next few years.
Farmland – Alternative Investment #2
Farmland has increased over recent years but there are still opportunities to purchase properties which provide stable income and protection from inflation. A successful investor can expect to lease the land to a farmer for a 4-6 percent annual yield, and historically land values have also appreciated by about 4-6 percent. Effectively the investor could earn an inflation adjusted 5-8 percent with little risk if it isn’t leveraged by debt. Over the last decade, farmland prices appreciated at a rate of 7 percent while the S&P 500 had a negative return. Farmland performed even better when factoring rental or operating income.
Lumber/Timber – Alternative Investment #3
Money does grow on trees when evaluating timber. Investors in forestry have the potential to earn a steady return from the growth of lumber as trees are always growing. Timber is also historically known for being a great inflation hedge. The land itself also appreciates in addition to the lumber. From 1990 to 2007, the National Council of Real Estate Investment Fiduciaries (NCREIF) Timberland Index had an annual return of 12.88 percent – higher than the S&P 500′s annual return of 10.54 percent and with less volatility. Investors could buy stock in timber companies such as Plum Creek (PLC) and Rayonier(RYN) that have dividend yields of more that 4 percent, or they could invest directly in land and lumber projects.
Arbitrage – Alternative Investment #4
Although much more lucrative in the 1970′s and 1980′s than today, there remain several arbitrage strategies that provide cash flow consistent better than a treasury and with less inflation risk. Merger arbitrage funds ARBFX and MERFX have appreciated by an average rate of 4 percent over the last 5 years and investors aren’t dependent on interest rates falling to make a profit.
Foreign Real Estate and Businesses – Alternative Investment #5
While the U.S., Europe, Japan, and other developed countries are expected to see stagnating economies for the foreseeable future, real estate and other businesses in developing nations were much less affected by the credit crisis of 2008 because they didn’t use the same degree of leverage as the U.S., Europe, and Japan. For this reason they will recover faster and offer higher returns.
Conclusion
By focusing on alternative investments it is still possible for investors to achieve cash flow and annual returns between 4 to 10 percent.
