As noted in a recent CNN business article, investors are “holding their noses” and buying stocks because “there is no alternative.”

TINA (There Is No Alternative) has become a popular mantra on Wall Street. It explains why stocks are near record highs despite concerns about trade tensions with China and what’s expected to be another round of lackluster corporate earnings next month.

Not even a huge surge in crude prices Monday following an attack on Saudi oil facilities over the weekend was enough to dampen investor enthusiasm all that much. The Dow fell a little more than 150 points, or about 0.6%, Monday. That’s a pretty tame drop, especially when you consider that the blue chip average had gained for the prior eight trading days.

It appears that investors are holding their noses and buying stocks because of the TINA trade. With the Federal Reserve expected to cut short-term interest rates again at its meeting this week, stocks could get another boost.

We recently wrote about investment risks related to the inverted yield curve. While an inverted yield curve is a reliable predictor of a coming recession and market correction or crash, it also tells bond investors that interest rates on bonds will remain low for years to come. While the prospect of lower interest rates for years to come makes bond investing seem less attractive to many investors it also makes stocks more attractive to others. For those who see stocks and bonds as their only investment choices, the TINA (There Is No Alternative) view to investing makes sense. However, from our viewpoint, this is a short-sighted defensive posture that is full of risk.

What Are Your Investment Alternatives?

When many folks think of investing, they think of stocks, bonds, and cash. There are alternatives. Some are so-called alternative investments like real estate, commodities, derivatives contracts, managed futures, hedge funds, and arts/antiquities. When choosing alternative investments, the same principles of intrinsic value should be applied to make your choices as to investing in stocks. Other “investments” that make a lot of sense are paying down your credit card balance or paying ahead on your mortgage if you have a locked-in high rate.

Real Estate Investments

Your first real estate investment should be your home. The mortgage interest rate deduction makes this an attractive investment for anyone. And, over the years, you will not only pay less on your mortgage than if you are paying rent but will also have a home to live in free and clear of debt in the end. For most Americans, their home is their greatest financial asset when they reach retirement.

Second homes can be a good real estate investment as well. However, recent changes in the tax law have taken away the mortgage interest deduction on second homes. Thus, any investment in a second home, vacation home, other property will need to stand on its own merits.

Alternative Investments in REITs

According to Investopedia, REITs (Real Estate Investment Trusts) allow investors to “buy shares in commercial real estate portfolios.” They then receive income from a collection of properties such as apartment complexes, health care facilities, hotels, data centers, energy pipelines, cell towers, warehouses, and even timberland. There are equity REITs, mortgage REITs, and hybrid REITs. The Investopedia article has useful descriptions of each of these alternative investments.

Commodity Investing: Gold

Unless you have the background and expertise to predict changes in the live cattle, pork belly, wheat, corn, or soybean markets, these investments are best left to the folks with the skills, experience, and resources to do this sort of trading. However, many investors choose to invest in gold as a hedge against inflation or as a bet on the market taking a downturn. Some investors choose to purchase gold bullion as bars or coins and store the gold themselves in a safe deposit box. Those who choose to purchase substantial quantities can find insured gold deposit facilities. Gold mining stocks often go up in value faster than gold in a bull market and Gold ETFs allow one to participate in an upward swing of gold and get out in a timely manner. We have written at length about the benefits and risks of long term gold investing.

Hedge Funds as Alternative Investments

Hedge funds attempt to multiply the profits of normal market movements through “hedging” strategies like holding both long and short positions in markets. These alternative investments are commonly in stocks. When you invest in a hedge fund you trust the skill and timing of the fund operators to make you a profit in excess of what your own market investing would provide.

Practical Investment Alternatives to Today’s Stock and Bond Markets

There are basic and safe ways to invest outside of the stock market and bond market and there are risky ways. Paying down your credit cards, paying ahead on your home mortgage, or investing in a well-managed REIT are practical ways to invest outside of the stock market. If you have money that you want to invest for the long term and are willing to wait, practical alternatives include US farmland and offshore investments in developing economies.

And, many smart long term investors are perfectly happy with investments that do not lose any money, such as long term bonds, Treasuries, and CDs at your local bank. This may not be a bad approach when you are unsure where the stock market is headed and if another Financial Crisis is around the corner!

Simple Steps to Successful Investing

• Take advantage of 401K’s, IRAs, and other tax deferred investment vehicles
• Invest in your home
• Pay off credit card debt before any other significant investing
• Keep your investment vehicles simple

IRA’s and 401 K’s

An IRA is an account that you create with a financial institution such as a bank or stock broker. It gives you a way to save with the growth of you investment being tax free or tax deferred.

Issues such as whether you use a traditional IRA or a Roth IRA are important but the most important part is to have your investments increase in value with being taxed until you cash out.

A 401 K is similar to an IRA but it is sponsored by your employer. A common benefit is that your employer matches your contribution each year. Your money grows without being taxed over the years and is only taxed when you withdraw it during retirement when you income is less and your tax bracket is lower.

Buy Your Home instead of Renting

Interest on your home mortgage is deductible on your income tax. This law is meant to promote home ownership and economic stability. Simple steps to successful investing include owning your own home.

Pay Off Credit Card Debt

In our article featuring tips on how to start investing we mention paying off credit card debt.

Before you start putting money into stocks you need to pay off your credit cards because the interest you pay on those is more than a beginner can expect to make on his money in the market.

In fact, the interest paid on credit card debt is greater than many professional investors can reliably make year after year. The first simple step to successful investing is to pay of the credit cards.

The Minimalist Approach to Successful Investing

One of the simple steps to successful investing is to take a minimalist approach as suggested in an article by CNBC.

Life is complicated enough. The number of investment choices in a typical 401(k) plan – about 25, according to a recent report from the Investment Company Institute – is proof.
If you have a current 401(k), an individual retirement account or two, and perhaps a 401(k) from a former job, you may have money in dozens of funds. That’s not even factoring in an individual retirement account and a brokerage account.

Across these accounts, you may be duplicating where your money goes.

But do you really need to choose that many investments?

Their suggestion is to use three index funds that track US stocks, bonds, and international stocks. They also suggest a mix of taxable, tax free, and tax-deferred accounts.

Active versus Passive Investing

Over the years more and more investors have found that they are unable to successfully time the market. And, many find that their stock picks, bond purchases, and real estate investments are not beating the return on an index fund that tracks the S&P 500. Thus, many have moved to passive investing.

If you want to be an active investor and believe that your investment choices will outperform a set of passive investments, you need to spend the time necessary to track your investments and do research for picking new ones. If you simply do not have the time to do this, consider the simple steps to successful investing that we suggest. These steps are also useful if you are interested in ESG investing.

Simple Steps to Successful Investing PPT

Confusing Risk and Volatility

Reuters writes that we should never confuse risk and volatility.

Of the many lazy and dangerous ways of thinking about investment these two rank near the top: that risk equates with volatility and that risk and rewards are a straight trade off.

Both are overly simplistic and both lie at the heart of some of the most colossal errors in recent finance. And while both contain large amounts of truth at their core, both concepts represent shorthand versions of reality rather than tools which always, or even usually, work.

Over the long term of an investment, the only reason to fear volatility is if it threatens to result in permanent loss. We have written about long term investing and how five to ten years is an appropriate time to put money into a promising investment. One of the reasons for this time frame is that investments can be volatile and market timing is always less than perfect.

Investors who choose the most risk-free investments always give away the potential for greater profits. When we wrote about how to invest without losing any money, we wrote about these investment vehicles, in order of lesser to greater risk:

• Bank deposits with Federal Deposit Insurance
• US Treasury Bills, Notes, and Bonds
• Investment Grade AAA and AA Bonds
• Long term value investing based on intrinsic value assessment

Within any investment portfolio there should always be a place for these investments. Then, when a person needs money, they will not need to sell a stock, for example, when the market has just crashed. By in large, the closer one gets to retirement, the more conservative should be one’s portfolio. Nevertheless, there will always be a place for long term investment in stocks and others investment vehicles of which short term volatility is normal.

When Are You Willing to Accept the Risk?

Some of the most spectacular profits in real estate, bonds, or stocks come from buying in a depressed market and selling when prices return to normal. The problem is that many times there are extremely valid reasons why an investment has lost value. CNBC writes about bond investors buying risky high yield junk bonds. Many are betting that the mid-range volatility that has taken bond prices down will result in an upward swing in the reasonably near future and certainly before some of those bonds go into default.

This is a matter of market timing and is a valid reason to equate volatility with risk. Anyone who is an expert in buying and selling bonds is welcome to engage in the business of picking up junk bonds at the right time. But, anyone who does not have a clue about market timing in this sector needs to avoid investing in an area where they have not knowledge or expertise.

Is a Volatile Investment a Risky Investment? PPT

Can You Profitably Time an Investment Cycle: The 4 Phases

An investment cycle has four parts:

• Accumulation
• Mark-up
• Distribution
• Mark-Down

Accumulation

The accumulation part is in the late stages of a substantial market correction or crash. Many investors are throwing in the towel. But, this is when the smart money enters or re-enters the stock, bond, and real estate markets. Can you profitably time an investment cycle by purchasing at this time? The key to success at this point is to be sure that the market has bottomed out. At this time competent intrinsic value calculations will indicate what investments to buy.

Mark-up

The start of the mark-phase of the investment cycle is when many investors get confused. Unemployment is worsening but many stocks are going up in price. This is because the market discounts what it believes will happen. The prices of stocks and other investments have already bottomed out. Smart investors are cherry picking the best opportunities and starting to see gains.
The mark-up phase becomes self-perpetuating as more and more investors re-enter the market and prices get bid up across the board. This is when the rising tide raises all ships. Unfortunately, late-entering investors expect to see the same profits continue and they bid up prices beyond what fundamentals will support. Can you profitably time an investment cycle at this point? Again, you should rely on intrinsic value, as some companies will still be making money and are good long term investments, while others will be due for a fall.

Distribution

The distribution phase of the investment cycle is when the folks who bought in phase one and early in phase two start to take their profits. There are as more sellers than buyers. Prices become volatile. Those who successfully anticipate the swings of the market will profit and those who do not will sustain losses. Can you successfully time an investment cycle at this point? Yes, you can. You can start to take profits and adjust your portfolio to a more defensive posture.

Mark-down

The mark-down phase of the investment cycle is when prices are in steady decline. This can be gradual or it can be precipitous, when driven by an economic recession, social unrest, or war. Depending on whether or not you are still invested at this point, the question will be if you can hold on until the cycle starts again after the markets have bottomed out. The key factor at this point is the quality of the investment you have. If you own investments that are likely to weather the storm and even come out stronger on the other side, you might as well hold on. If you entered the market late and purchased junk, you might as well sell for pennies on the dollar before your investment is worthless.

Can You Profitably Time an Investment Cycle? PPT

How Do You Choose Which Assets Classes to Invest In: Stocks

Stocks have two basic things going for them. Over the years the US stock market has outperformed real estate, bonds, and money in the bank. And, the stock market offers liquidity that real estate investments lack. You can buy a stock one day and sell it the next. Try doing that with a piece of real estate! So, why shouldn’t you put all of your investment capital in stocks? If you remember the 2008 stock market crash, the dot com crash, or the various other market crashes going back in time you can see that there can be risk in investing in stocks. There are ways to deal with that risk such as by choosing a range of stocks instead of just one or two and learning to assess intrinsic stock value as a guide to profitable investing.

How Do You Choose Which Assets Classes to Invest In: Bonds

We discussed treasury and corporate bonds in our article entitled how to invest without losing any money.

US Treasury bills have maturities of a year or less. US Treasury notes have maturities from two to ten years. And, US Treasury bonds have maturities of ten to 30 years. Each of these investment vehicles is backed by the “full faith and credit” of the US government. The risk of loss of any of these if held to maturity is nil.

How to invest without losing any money in US Treasuries is to hold them to maturity or only sell them at a profit.

The same approach applies to AAA corporate bonds issued by Johnson & Johnson or Microsoft. These asset classes do not outperform the S & P 500 over the years but they do outperform a lot of individual stocks. If want you want is to keep your money safe, not lose any, and make a decent rate of interest along the way, bonds as an asset class are a good addition to any investment portfolio.

How Do You Choose Which Assets Classes to Invest In: Cash and Short Term Investment Vehicles

If you believe you will need your money fairly soon, you do not want to tie it up in stocks, long term bonds, or real estate. Any of these asset classes may go into a slump and that would mean that you lose money when you take your cash. A good way to get a little interest on your money is to create a ladder of short term bonds or even CD’s at your bank. You will always have cash available when needed. This asset class does not outperform any of the others but it is the most flexible. There are a lot of smart investors who hold cash when they do not trust which way interest rates, the stock market, or real estate prices are going.

How Do You Choose Which Assets Classes to Invest In: Real Estate

Your own home is the real estate investment that you need to make first and foremost. Long term real estate investment is a skill that needs to be developed over the years and hopefully not by losing money along the way. If you want to take advantage of profits from real estate and not sink all of your money into a piece of property, consider REITs which are real estate investment trusts. These are investments you can get  into for a reasonable amount of money and get a good return. And, you do not need to manage the property yourself!

How Do You Choose Which Assets Classes to Invest In: Gold

Gold bugs think that sooner or later all paper currencies will be worthless. Thus, the only way to retain any value for the future is to hold precious metals. The problem with gold is that it does not pay a rate of interest and its price goes up and down. If you want to have a little gold as a reserve, just in case, there are to viable approaches. One is to simply wait for the price of gold to plummet and then buy. The other is to use cost averaging. Buy the same dollar amount of gold every month or so. Gold is a valid hedge against catastrophic economic and social events but the S & P 500 has been a better choice over the years.

How Do You Choose Which Assets Classes to Invest In? PPT

Adding on to the US and Other National Debts

US News warns that a crisis is coming. They warn about asset price bubbles, mispriced credit and excessive debt on a global scale.

Another key ingredient for a global economic crisis is a very high debt level. Here too today’s situation has to be very concerning. According to IMF estimates, today the global debt-to-GDP level is significantly higher than it was in 2008. Particularly concerning has to be the fact that far from declining, over the past few years Italy’s public debt has risen now to 135 percent of GDP. That has to raise the real risk that we could have yet another round of the Eurozone debt crisis in the event that we were to have another global economic recession.

Today’s asset price bubbles have been created by many years of unusually easy global monetary policy. The persistence of those bubbles can only be rationalized on the assumption that interest rates will remain indefinitely at their currently very low levels. Sadly, there is every reason to believe that at least in the United States, the period of low interest rates is about to end abruptly due to an overheated economy.

High interest rates will choke off the US economy even as tax cuts may be providing a temporary boost. In addition, Seeking Alpha has a good article about America’s impending debt crisis and how it will end badly for stocks.

The U.S.’s enormous spending addiction has created a massive debt bubble that is going to lead the economy to its next financial crisis.

Consumer, government, credit card, auto loan, mortgage, student loan and just about any other debt you can think of is at a new record – and it won’t end well.

America’s impending debt crisis is likely to materialize within the next few years, and when it does, its destabilizing effects will be felt deep throughout the financial system.

So, how do you protect your retirement savings before the US economy implodes again?

Income versus Growth

Along the way to retirement you want to see your portfolio grow. Certainly if you invested in tech stocks like the FANG darlings in the last years you have been successful. However, with growth comes risk which is what you want to avoid when you are no longer drawing a paycheck. Dividend stocks with an unbroken history of payments are ideal. Utilities are an example of stocks that produce a steady and reliable source of income over the years. If interest rates go up the price of a utility stock will often fall but the dividend will typically remain the same and because you want income during retirement that is what is important.

Fundamental analysis is crucial to success in picking investments that will weather an economic storm. What can you expect from each and every investment in the case of a major economic downturn? And how can you prepare? Your home may have appreciated in value since the crash. If you are planning on downsizing for your retirement years it might be wise to make that move while the economy is still OK and then put your excess cash to work in a ladder of short term bonds or a well-chosen dividend stock.

Time Is Running Out

The Telegraph quotes the managing director of the Institute of International Finance in Washington as saying that in regard to capital flight, time is running out.

China is rapidly losing the confidence of global lenders and capital outflows risk turning virulent if the current policy paralysis continues, the world’s top banking body has warned.

Mr Collyns said the authorities have so far failed to articulate a coherent strategy, and there are serious worries that outflows of capital could accelerate, broadening into a flood beyond Beijing’s control.

Mr Collyns said China has already allowed the renminbi (yuan) to weaken against the country’s new trade-weighted basket of currencies, stoking suspicions that the recent shift from a crawling dollar-peg to a more opaque foreign-exchange regime is really a cover for devaluation.

The IIF, the chief global body for the financial industry, calculates that capital outflows from China reached $676bn last year.

The article mentions that by whatever route capital leaves China it ends up in places like the London property market. In fact, wealthy Chinese are buying property in major cities across the globe. As China throws money at it stock market in order to stop plunging stocks analysts are concerned that the nation could burn through much of its $3.3 Trillion in foreign currency reserves creating havoc in the land of managed capitalism. So, how can you benefit from the coming Chinese economic collapse?

Follow the Money

If the people who made money over the decades during China economic rise are bailing out this is probably not the time to invest in China. If you follow the money you see that money flowing out of China is going into high end property. You could buy a condo in Manhattan, the near North side of Chicago on the lake, or London or you could invest in a REIT, a real estate investment trust. A recent Forbes article discusses REITs to buy.

As a rule of thumb I usually recommend stalwart REITs that have a long track record of paying and increasing dividends . It’s really hard to go wrong with companies like Realty Income (O), W.P. Carey (WPC), National Retail Investors (NNN), and Omega Healthcare Investors (OHI) – all of which have demonstrated exceptional risk management practices through multiple economic cycles.

Our thought is that you can benefit from the coming Chinese economic collapse if you follow the money that is flowing out of China.

How Can You Benefit from the Coming Chinese Economic Collapse? PPT

Growth Leads to Profitable Investments

Some time back our offshore investment advice was that one consider investing in middle class growth in Latin America. Strong economies commonly develop strong middle classes and the purchasing power of the middle class further drives the economy. Latin America has been growing and so has its middle class. The middle class has grown by a forth in the last ten years. Per capita income south in Latin America has gone up from $7,000 a year range to just under $12,000 a year. Things have slowed since the 2008 market crash and recession but the middle class has not lost ground. Investing in growing foreign economies is not limited to Latin America. Economic growth is slowing in China and around Asia but there are still lots of opportunities.

Taking Cues from the American Experience

Great stocks to invest in during the early twentieth century in the USA included the likes of General Electric, AT&T, Coca Cola, and virtually any public utility. As infrastructure was developed, those doing the work were rewarded. As people earned money they spent it and companies like Coca Cola learned to cater to the American taste for soft beverages. Our basic offshore investment advice is to take a look at developing economies in Asia and Latin America and find out who is likely to profit as infrastructure is improved and made more widely available.

They Do Not Make Any More Land

One of the basic tenets of investing in property is that there is a limited supply. Good farmland in northern Iowa used to sell for one hundred dollars an acre, and then a thousand, and now commonly $10,000 an acre. Land in downtown Tokyo is exorbitantly expensive but was not always so. Land used to be cheap in the banking district of Panama City, Panama and now goes for thousands of dollars a square meter. Good offshore investment advice is to look where the action is and is likely to be and buy property before the prices go into the stratosphere. But, what do you do when the price goes up? Do you sell?

Offshore Investment Advice about Taxes

US tax on foreign source investment income can be significant but as a rule income must be realized in order to be taxed. If you are lucky enough to buy downtown property in a place like Panama City, Panama, Rio de Janeiro, Brazil or even Manizales, Colombia before prices go up you do not need to cash in and take your profits. A reasonable way to benefit from your good fortune is to set up a long term lease with a local business, collect and pay taxes on the rent checks, and let the property increase in value over the years.

More Resources

• Diversification of an investment portfolio
• Taking advantage of growth in evolving offshore economies
• Foreign government sponsored investment opportunities
  • For example a developing nation may wish to develop a given industry and will provide land at a low price, extended freedom from local taxation and other significant benefits to a specific type of foreign investment
• Low cost labor
• Proximity to attractive markets
• Likelihood of appreciation of the currency in which the investment will be made
• Legal means of reducing a tax burden
• Taking advantage of cheap investment opportunities with the likelihood of substantial growth

Some time back we wrote about Foreign Real Estate Investments. In the Panama section of the article we noted that

one can buy commercial real estate in growing market like Panama and collect rent checks as property values go up. Even in good markets there are business failures. Buying repossessed properties in a country like Panama can be lucrative if one has the services of a local firm that will scout out investment opportunities.

We also noted that

the rent checks from commercial property in Bogotá, or Buenos Aires can be banked in Colombia pesos or Brazilian reals.

Bank the proceeds from your property offshore, make good interest from the local bank, and watch your assets, denominated in a healthy foreign currency, growth as US debt eats into the value of the US dollar.

US Tax on Foreign Investment Income

The key part of all this is that income is taxed when it is realized. Here are a few key features of current US tax law regarding US tax on foreign source income.

What Counts as a Foreign Financial Asset

• Bank accounts, investment accounts and mutual funds maintained at financial institutions outside the USA
• Stocks, bonds or other securities issued an entity not of the USA and not an ADR or other asset held in an US investment account
• Any interest in a foreign corporation, partnership trust or other legal entity
• Any financial instrument or contract issued by an entity from outside of the USA

How much do you have to invest or make in order to worry about US tax on foreign source income? This ranges from $50,000 on the last day of the year or $75,000 on any day of the year for a single person living in the USA with assets abroad to $400,000 at the end of the year or $600,000 at any time of the year for a married couple living abroad. As always there are tests to pass in order to qualify according to IRS rules.

Our point of mentioning realized income is that real property in an offshore location does not appear to be in the list of offshore assets considered taxable by the US government. If you would like to consider any of our Three Good Offshore Investment Ideas, think of offshore property either to buy and hold, or for eventual sale and profit or for rental income. Think of investing where the currency is weak and likely to strengthen over time, making your investment more valuable as well. In the end it is not so important to reduce your tax burden as to find solid investments.

AND, as always consult a tax attorney for the details before investing as laws change as do investment opportunities.

More Resources

Roth IRA versus a Traditional IRA

A Roth IRA is a specific type of individual retirement account. United States tax law allows individuals to put aside a set amount of money in such an account. The money is first taxed. However, if the terms of the Roth IRA are met the money is not taxed upon withdrawal. On the other hand with a traditional IRA one can put aside a set amount of money for retirement and deduct that amount from ones taxes. But, when one takes money out, usually during retirement, the withdrawals are taxed. The rationale is that a person is not earning a regular income during retirement and as such pays at a lower tax rate and perhaps pays no taxes at all. If you invest in dividend stocks you will pay taxes on the dividend when your income is lower if you have a traditional IRA and you will not pay at all if you follow the rules of a Roth IRA. As always seek expert advice and read the fine print before investing in a Roth IRA versus a traditional IRA.

What Can You Invest in with a Roth IRA versus a Traditional IRA?

In general one can invest IRA assets in common stocks, bonds, mutual funds, bank certificates of deposit, or real estate. All such investments through a Roth IRA versus a traditional IRA must meet the specific requirements of the Internal Revenue Service. As a rule there are more types of investments that can be made in a Roth IRA than in other types of tax advantaged retirement plans such as pensions, profit sharing accounts, 401Ks, etc. What is available may depend on the trustee of the account. For example, a bank may only offer CDs. A stock broker may only offer stocks. And, mutual funds will obviously only offer mutual funds.

How Much Can I Invest in an IRA?

The IRS limits how much you can put in an IRA. It has to be the smaller amount of your taxable compensation and the limit amounts listed below for 2013 to 2014.

IRA Investments Are Still Investments

When you make your decision regarding a Roth IRA versus a traditional IRA you still need to do your fundamental analysis of the investment. There is no protection against bad judgment just because your money has a tax advantaged status. Beware of investing in gold through your IRA. The shiny stuff is headed down. On the other hand, if you believe that over the long term gold might recover it might be a good idea to buy stock in a gold ETF with a Roth IRA versus a traditional IRA and hold for the long term.

More Resources