Equity investing vs Bonds, Real Estate, etc. (junk bonds, Etrade, IRA)

[bale002]

Originally Posted by user_id

Anyhow, I think investing in equities is a sucker's game. Either trade or go into other instruments (bonds, real estate, etc).

In general, I agree with this recommendation.

The most common analyses of the buy-and-hold equities strategy depend on such discretionary assumptions as the holding period, subject to manipulation, the universality of the US market during a particular period in history, and the assumption that such condition will continue going forward.

I, for one, would not invest 60%-80% of my long-term assets in some general stock index.

I have instead the bulk of my assets in both US domestic and foreign bonds, both directly and through funds. Some of these bonds I purchased not long before the 2008 crash, and they have all recovered to the point of capital gains, plus income during the meantime.

I was lucky enough to buy a US domestic residential property, in a prime area relative to the local market, for cash in 2008 at a price which seems to have set the bottom for the neighborhood in terms of dollars per square foot.

I had also bought several years ago a residential property in a prime location in a growing provincial city in an otherwise volatile emerging market country whose value has nevertheless increased despite the global recession and the drop in commodity prices.

I have recently bought another property in the same prime location from a potential developer in financial trouble, with a view to long-term capital gains, though in the meantime it will also generate some monthly income.

My equity investments are mostly also income-generating, though with a view to participating in any general market or sector-specific rises, but so far the results have been mixed; in some cases, I have suffered mostly unrealized capital losses that won't be made up for probably another two years (barring another significant crash).

I do some money market trading in a currency pair where I have my own natural business interest, therefore mostly for hedging purposes, not speculation, and as a way to enhance current income, mostly the selling of covered calls and puts.

I may do the same for short-term bond and maybe some equity positions, but income-generating equities, mainly through ETFs.

In short, then, I mostly invest in bonds and real estate, both US domestic and international, for long-term capital preservation/appreciation current and in some cases also income generation.

In this connection, what about this "etc." mentioned by user_id in his quote that I cited?

I invest some portion of assets in equities, mostly on long-term speculation, which however generate income in the meantime, with mixed results so far.

I do short-term money market trading, but based on natural business positions for hedging and income-enhancement purposes. I may also do the same with short-term bond positions.

Would others be willing to share their investment/trading profiles?

And, in particular, would others be willing to share ideas, views, and opinions for long-term investments, other than bonds and real estate, that both generate income and provide for long-term capital preservation/appreciation?

Thanks.

[michiganmoon]

I really like your real estate investments. If the stock market collapses, I am out of money and have nothing, where as you always have the buildings. I have thought of buying a tiny house that I could pay off quick to rent out, but my wife already has a duplex and I don't know if I have the time.

I do not, but I have heard of people investing in Antiques, Arts, Land, and Precious Metals (not a stock, but the actual object) with mixed, but mostly positive success.

Personally, I invest mostly in stocks. Stocks really aren't for the faint of heart, but I have done well with them so far. I figure that the odds are in favor of the stock market beating bonds over the long term.

"Would others be willing to share their investment/trading profiles? "

I am 30 years old.

My wife owns a tiny duplex, which breaks close to even with our mortgage payment on it. She also has a 401K and Traditional IRA, which do not have any current contributions and small numbers. She will start putting around 3 or 5% in again soon.

I have a 401K which gets 15% of my income (includes my employer match), a Roth IRA, bond money with the State of Michigan, and an Etrade account that gets $300 a month. My stocks are slightly more aggressive as I am young.

I figure that this will set me up nicely for retirement, especially since our house will be paid off in about 13.5 years.

[bale002]

Originally Posted by michiganmoon

I do not, but I have heard of people investing in Antiques, Arts, Land, and Precious Metals (not a stock, but the actual object) with mixed, but mostly positive success.

I also have some investments in lumber, both directly and through a fund (mixed with other commodities).

I suppose one could do the same with precious metals, as in having a storage area and selling to end-users. Otherwise, trading futures, for example, is more like speculation and there is significant time decay.

I have investigated investing in farmland, but the minimum investment is often $50 million, if lucky $5 million or $1 million.

I know of some art funds, but personally do not believe in it because works of art are not productive assets. At any rate, similar to farmland, it takes big money to make big money in art.

[michiganmoon]

What is your lumber investment like? I assume you own some acreage. Who do you sell to?

My father in law owns about 30 acres of good land and use to make side money by planting pumpkins, tomatoes, and etc and simply selling them in his front yard. He had good land and didn't have to spend money on water and such, and the seeds were dirt cheap or even from his past crops.

[bale002]

Originally Posted by michiganmoon

What is your lumber investment like? I assume you own some acreage. Whom do you sell to?

My father in law owns about 30 acres of good land and used to make side money by planting pumpkins, tomatoes, and etc and simply selling them in his front yard. He had good land and didn't have to spend money on water and such, and the seeds were dirt cheap or even from his past crops.

I distinguish between timber and lumber.

The chain can be somewhat long. I am downstream, investing in lumber mill operations that sell to construction companies and small-time end-users like carpenters or even do-it-yourself types. Real estate aspect is the lumber storage and cutting area, usually in urban settings, not a question of acreage in the woods, another, upstream aspect of the business.

What happened to your father-in-law's acreage? You mentioned "side money".

We have discussed farmland investing on this forum before, and it seems that a minimum direct investment for serious money in a serious long-term investment is around $5 million. As I mentioned, to invest in farmland through a fund organized by a professional investment company, minimum right now is often $50 million, way, way beyond my means.

Black Rock offers an easily accessible "real assets" fund, including timber, as well as mining and metals and such, but which pays a quarterly dividend, though the share price is volatile, roughly tracking swings in the usual commodity prices.

[eskercurve]

This is a fun thread! It's rare you talk about alternative investments, since tangible investments aren't "sexy" like equities and are more under the radar than bonds.

BTW, the Black Rock tangible assets fund will likely be volatile because futures markets in real assets are volatile. When I lived in Chicago, and I went down by the Board of Trade during my lunch break or days off school, I would see all these traders smoking cigars and looking all burned out. It's not for the feint of heart. Or those who value their sanity.

But that's if you're actually there. Sitting in your living room with a latte and trading is a little better.

Anyway, my rambling aside, I am thinking of investing in the following once I get a house:

- residential real estate (though this will be hard, since I'd have to rent out a room and I don't think my wife would be comfortable with this idea), and I don't own any property that was cheap to buy and rent out at a profit, nor do I have the time horizon to wait.
- antique cars. I love cars and if I could get my hands on old cars and parts, I could build a shed and repair them and sell them. This would be time consuming but after I get my Master's, I figure I'll have the time for it. That requires buying a house first and in Seattle that's a HUGE investment and I still think homes have another 10% downside.
- wine. Wine is an interesting thing for investors because well-made wine only gets better with time, and the longer you hold one, the more rare it gets, especially for good years. Though, this is tough to get into as typically the sellers and buyers are on first name bases and many of the wine funds are based in the Caymans or whatnot, but it's interesting.

[Sandpointian]

Bonds going forward will pay a pittance. The great bond rally is over. From here, things stay quiet and then start sliding (yields increasing eventually)

RE is good for no more than 2-4% net return over the long run, but with lots of hassle and liquidity.

Trading is great when you are young, but not when you mature to a position of responsibility. One cannot be watching the screen 24/7. Trust me, I used trade.

The simplest strategy is to buy a globally diversified set of ETFs and mutual funds, vary the weighting and trade trends--including shorting and currencies--when things get extreme. Keep some cash, forex, and gold if you feel the need. Revisit your positions once a month (rather than quarterly) and after major movements in the market.

This way your returns are going to easily beat inflation. They will be zero hassle. And you can have a life, too.

And by all means, do not trade on margin. It is the easiest way to destroy your finances and your lifestyle.

S.
P.S. Stay away from treating collectibles as investments. Unless you deal in exceptionally rare and fine stuff, you can easily lose $. Wine? Furniture? Coins? Cars? Most should enjoy them. They are labours of love, not items that you want to lock in 6-7% per annum!

[bale002]

Originally Posted by Sandpointian

Bonds going forward will pay a pittance. The great bond rally is over. From here, things stay quiet and then start sliding (yields increasing eventually).

RE is good for no more than 2-4% net return over the long run, but with lots of hassle and liquidity.

Trading is great when you are young, but not when you mature to a position of responsibility. One cannot be watching the screen 24/7. Trust me, I used to trade.

The simplest strategy is to buy a globally diversified set of ETFs and mutual funds, vary the weighting and trade trends--including shorting and currencies--when things get extreme. Keep some cash, forex, and gold if you feel the need. Revisit your positions once a month (rather than quarterly) and after major movements in the market.

This way your returns are going to easily beat inflation. They will be zero hassle. And you can have a life, too.

And by all means, do not trade on margin. It is the easiest way to destroy your finances and your lifestyle.

S.
P.S. Stay away from treating collectibles as investments. Unless you deal in exceptionally rare and fine stuff, you can easily lose $. Wine? Furniture? Coins? Cars? Most should enjoy them. They are labours of love, not items that you want to lock in 6-7% per annum!

I agree that hardcore trading on margin is for the young and brash. I too do not believe in treating collectibles as investments, unless it is very, very high end, like an art fund that I know of, and even then it is spare cash to play with. Not for the average person.

I also agree with a diversified set of global ETFs and mutual funds. But it is not exactly hassle-free, since you also mention varying the weighting and possibly making adjustments once a month, including shorting and currencies. Sounds like portfolio/position hedging. Even in this scenario, I would hardly eliminate bonds.

In any case, what set of global ETFs and mutual funds would you recommend?

As for real estate, I agree that it is not hassle-free. Yet 4% net return may actually not be so bad, depending on net of what, exactly, and the quantity of investment; e.g. 2.5%-4% on a large amount may be significant income. And does that 2%-4% estimate apply to the US only? There are other real estate markets out there and the dynamics are different.

I also believe in investing directly in real businesses that actually produce something. By direct investment I mean personal lending to, or a direct equity stake in, an actual business whose owners the lender/partner knows personally and can possibly contribute something to actual management. That is hard to do for most people through a pre-packaged financial product because private equity funds, like farmland funds, have huge minimum investments and other requirements. In this sense as well, better opportunities may be available in emerging countries than in the US, assuming that the investor has personal contacts abroad and knowledge of local situations.

Finally, nothing worthwhile is risk-free and hassle-free, one must put real work into any worthwhile endeavor; even your own example requires skilled investment decision-making and management.

Anyway, would love to see your sample portfolio for a diversified set of global ETFs and mutual funds.

[drshang]

Bonds were a great investment a year ago. JPM and other very solid banks were paying 8-10% for bonds. Citi and some other less stable banks were paying nearly double that. Of course hindsight is 20/20, but junk bonds/high yield bonds performance over the last year has been astounding. I agree with Sandpointian - not really a great risk/reward now.

The problem with buying real estate is that you are often "buying a job" and returns on it are not always great. Real estate tends to be much less efficient, especially smaller investment properties, so you can often get a great deal and it can create great returns. It's also a lot easier to value an investment property (IMO) than a stock. But I know some people who have bought RE and weren't prepared for the amount of work that it requires, and either made less money in their business or had to hire out management and it destroyed their profits.

Personally I am a fan of keeping a solid portion of assets in a well diversified set of index funds or low cost mutual funds. I like a 50/50 allocation of US/international. I think it's fine to put 20-30% of your long term assets in things like bonds/REITs/commodities. Combining this with owning some investment properties is a great idea assuming you can get them at a good price, and fit the profile for someone capable of investing in this kind of thing. You can always invest in a REIT instead of owning property itself; for many people it probably makes more sense to do this.

Organizations like the Harvard/Yale endowments had great success buying raw materials (the actual materials) such as lumber, etc., but I think buying the actual raw materials (this includes gold) is not really a great bet for normal people without great resources and capital. People have been selling things like gold coins for 30-50% above the price traded on exchanges. The only people making money there IMO are the brokers.

Investing in businesses can be a great investment too, but will generally require some kind of specialized knowledge and is normally not a passive investment.

Stocks are still great investments because transaction costs are really low and they require very little maintenance given the return. The lowest 25 year return of the S&P 500 was in 1953, which includes the great depression of course...5.9%. Folks like Buffet have said they believe the long term future of stocks like the S&P 500 will be about 1% lower than historical averages...but you are still looking at 8.5-9%, with a heck of a lot of variance. The problem is a lot of people have gotten severely burned investing in equities over the last decade, and are certainly down on them. Valuations also aren't particularly favorable (IMO) for equities right now, which also hurts. Personally I think we're in for a double dip at some point here, and after that I like investing in foreign producers/assets that will do well in the event of a poorly performing US dollar. This includes a higher than average allocation to foreign producers, commodity producers, and highly globalized companies. You can also trade Forex, but I think for most people that's not a great idea.

EDIT: I would like to add that generally the point of "alternative investments" in a portfolio is to decrease your variance while sacrificing little/nothing/maybe increasing total returns. The idea is to find investments that aren't quite as correlated with the performance of equity indices. I mean everything will be correlated to a reasonable degree, but an important role of alternative investments is to find things with a relatively high yield and a relatively low correlation to stocks.

[ndfmnlf]

This portfolio is unconventional, but Nassim Taleb of "The Black Swan" fame promotes it: 90% T-bills, and 10% in microcap emerging market stocks. The idea being, you pair off the safest asset class (T bills) against the riskiest (microcap emerging markets). That way, you participate in growth while limiting your loss to 10%, improving your risk-adjusted return.