A Look at Alternative Investments, Stocks & Real Estate
by Christopher Levarek
“Diversification is protection against Ignorance”
- Warren Buffett
As we enter September 2020, the continued effects of a self-containment strategy in response to a virus pandemic are being felt across the United States economy. This strategy has directly impacted businesses, unemployment, GDP and inflation numbers putting many personally/financially into a state of distress.
Since this is an investment blog, I wanted to highlight how an investor can look at the situation and continue to hedge or diversify to protect one’s assets as the economy continues in the direction it is heading. Let’s dive into some economics and look at some investments that could be good alternatives to traditional investments for protection.
Stocks, GDP, Unemployment & The Dollar
At time of writing, both the S&P and the Dow Jones have hit record highs. Stocks are doing extremely well. Companies such as Robinhood, offering an app with investing capability via mobile, are exploding with growth as many investors jump on the bandwagon of the rising stocks. Companies such as Tesla, Apple and Zoom are setting records with no end in sight.
Now, most think stocks indicate a strong economy. If the stocks are doing well, the economy is doing well. This is in fact, incorrect. The economy actually drives stocks according to history through a few indicators, mainly GDP, unemployment and CPI or consumer price index/inflation.
However when we look at unemployment at around 10% currently, depending which source used, and GDP (Gross Domestic Product) which has fallen by 31.7% for quarter 2 and 5.1% for quarter 1, these paint a contrasting picture.
The last major indicator of a strong economy we will briefly touch on is the CPI. The CPI or the Consumer Price Index (CPI) “is a measure of the average change overtime in the prices paid by urban consumers for a market basket of consumer goods and services.” as per BLS.gov.
It is commonly though that, if prices are rising, people are spending and the economy is doing well. Yet at present, the CPI is very strengthened by the “printing of dollars” by the Federal Reserve, (more to come on this).
Subsequently, rising prices is directly in correlation to a falling purchase power of the dollar. As prices rise, it takes more dollars to buy those goods and services.
This leads into our next section…
The Dollar and Inflation
In order to stimulate the economy and keep prices increasing according to the CPI, the Federal Reserve prints money. The Fed actually doesn’t necessarily add more paper money to circulation, they simply “digitally” increase their balance sheet to be able to buy bonds from financial institutions or bad debt. They thus increase their debt on their balance sheet.
“On February 26, the size of the Federal Reserve’s balance sheet was $4.16 trillion. By June 10, this had jumped to $7.17 trillion. Hence, over a period of three-and-a-half months, the Fed printed and pumped $3 trillion into the economy. “ says an article from LiveMint. This “printing of money” has no intention of stopping as a new stimulus bill is in the works for both the Republican and Democratic parties.
It could be argued this printing of money is what is driving the stock growth and thus giving false indicators of a strong economy. However, for every dollar added to the pool of dollars, the value of the dollar decreases for the existing dollars.
As the value of the dollar decreases and thus the purchasing power of the dollar decreases, those holding dollars or investments in dollars often turn to other investments to hedge or protect their wealth.
This then leads into, what type of assets or investments would be suited for this protection of wealth against a falling dollar…
Real Estate, precious metals and foreign Investments
When inflation, the value of the dollar and a recession is in question, many investors turn to tangible assets or foreign investments. By buying assets with today’s dollars that hold value greater than the currency of the dollar, financial wealth is preserved or better sheltered against the devaluation or falling economy.
Real estate can be great investment with today’s dollars. Real estate values whether residential or commercial depend on demand and demand for real estate will always exist. Varying asset classes and real estate cycles will determine how much demand, yet unlike the dollar, the value of real estate will appreciate regardless of a downturn. A downturn can decrease current real estate value, but eventually according to history that value always appreciates again.
Source : pxfuel.com
On the contrary, the value of today’s dollar will always decrease unless monetary policy is drastically changed which is unlikely to happen.
Precious metals are a great hedge against inflation or the weakening dollar. When we talk of precious metals, we speak mainly of Gold, Silver and Platinum. These metals hold value around the world and typically see great gains during moments of recession or large currency devaluations.
Whether these are purchased physically or bought through publicly traded funds or stocks, this can be a good investment for 5-10% of a portfolio as a safeguard. Consider asking why even the great Warren Buffett finds now a good time to invest into Gold/Silver as his firm just put over $400 million into BarrickGold, a mining company for gold/silver.
Foreign investments or investing into other countries stocks, etfs and currencies can be a good idea during a dollar devaluation. Whether betting on a decrease in the dollar or preserving wealth through other countries in growth, these investments can be a smart move. Euro Pacific Capital is an example of one such company, owned by Peter Schiff, with multiple international funds to balance a portfolio.
However, there are a variety of other options such as these international stock funds and we encourage you to consult a financial advisor or do your research.
In Final
Diversification is key to wealth preservation. As we do not have a crystal ball, it is clear that there are a lot of unknowns at present and preparing for multiple scenarios might not be a bad idea. Invest not out of fear but with confidence based on education and research. Opportunity can be had in any cycle. Invest Smart!