Will Higher Capital Gains Taxes Hurt Your Investments?
Whenever taxes go up there is a concern that investment will go down. Such is the case with President Biden’s plan to increase taxes on capital gains. Will higher capital gains taxes hurt your investments? It will depend on how much money you make with your investments. It will depend on what vehicles you use to invest such as through an IRA. And, it will depend on how often you buy and sell stocks and other investments. First, let’s take a look at Biden’s plan.
Biden’s Capital Gains Tax Plan
President Joe Biden’s current proposal is to nearly double capital gains taxes for taxpayers who make more than $1 million a year. The immediate concern of some investors is that they will need to sell assets sooner than they expected in order to qualify for the current rates for short and long term capital gains. This could cause a stock selloff. Alternatively, investors will look to other strategies to avoid what appear to be confiscatory tax rates.
How Will Biden’s Capital Gains Plan Affect Your Investments?
In his speech to Congress, the President proposed upping the highest capital gains tax rate to 39.6% from the current 20% for long term capital gains. He also spoke about closing “loopholes” that let high earners pay lower tax rates than the average taxpayer. It is important to remember that, as proposed, this capital gains tax increase, would only apply to about 0.3% of taxpayers. Because short term gains are taxed as ordinary income, the proposal would bring long term gains to the same level and remove any incentive to hold on to an investment more than a year in order to save on capital gains taxes. However, the current proposal only applies to those earning more than $1 million a year. If your investments don’t fall into this range you have less to worry about. And, the tax does not apply to investments that you are still holding. If you choose to sell assets gradually you could probably avoid the worst of this plan by keeping your investment income below the $1 million threshold.
Ways to Reduce Capital Gains Taxes on Your Investments
There are four practical ways to reduce capital gains taxes now and should the Biden proposal become law. The first is to space out your asset sales. By simply keeping your yearly capital gains below the $1 million threshold you come out ahead. Time your asset sales and capital gains to coincide with losses. In other words, sell your losers at the same time that you sell your winners. Because you can carry losses forward, you may be able to do this more than once. A good strategy that works for any level of capital gains is to contribute to an IRA and 401 (k). Taxes are deferred until you take money out although at that time it is taxed as ordinary income but not capitals. Do this after retirement and you will typically be paying a lower rate. And, by taking money from your retirement plan in smaller amounts over the years you will be able to take advantage of lower rates.
Why Biden’s Tax Plan Is Not Hurting Stocks
As noted by The New York Times, Biden’s proposal is not hurting stocks which are rallying. Considering that Biden also wants to raise corporate taxes, this might be surprising. However, investors seem to be more interested in earnings, current economic data, and the likelihood of an economic boom tied to infrastructure investment. As they note, when the capital gains tax has gone up before it has typically been followed by a stock market rally!
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How Far Could Cryptocurrencies Fall?
When we wrote recently about the crypto with the best profit potential, we noted that many old school investors think that cryptocurrencies are a huge bubble ready to pop. But, that thought applies to any investment in the midst of a bear market. The first thing different about crypto is that there is no way to determine intrinsic value. The other is that cryptocurrencies can be are used to hide transactions and wealth and as such will eventually be subject to a higher degree of regulation. That appears to already be the case with the U.S. Treasury and the largest intraday drop in bitcoin for months.
Will Bitcoins Drop Again in 2021?
The story of bitcoin and other cryptocurrencies over the last few has been rallies followed by retreats followed by rallies. We have seen an impressive rally recently and now, as news of U.S. Treasury investigations arises, a fall. Yahoo Finance writes about U.S. crackdown reports.
Bitcoin (BTC-USD) is experiencing a massive sell-off, shedding almost 15% in the last 24 hours, the biggest intraday drop since February. The drop appears to coincide with reports that the US Treasury is planning to tackle financial institutions for money laundering carried out through digital assets. On Sunday, the flagship crypto shed nearly $8,000 and was trading 12% lower at $54,900 around 12PM in London, down from a day high of $61,293.
More than a million bitcoin positions have been liquidated in this correction amounting to more than $10 billion. Ethereum, which has outpaced bitcoin recently fell by 17%, double to drop in bitcoin. It remains to be seen if this is a correction or the beginning of a freefall in cryptocurrencies during 2021.
Will Regulation Kill the Crypto Boom?
This is a major question overhanging the rally in bitcoin and other cryptocurrencies. Like with every past rally, there comes a time when FOMO, fear of missing out, drives new money into a stock, market, or cryptocurrency. In our recent article about the crypto with the best profit potential, we looked at the “minor” cryptocurrencies and suggested that they had more room to run than bitcoin. However, if the U.S. Treasury starts tracking down folks who are using cryptocurrencies for money laundering, they will be casting a wide net. As we noted in our article, Buying Cryptocurrency 101, Cryptocurrency exchanges in the USA now need to report to the IRS (IRS Form 8949, Schedule D). Anyone who has been buying and selling and making a nice profit from the peaks and valleys of cryptocurrency trading may end up in trouble with the IRS and having to pay back taxes and penalties. As this sort of thing comes to light, it could occasion a stampede out of cryptocurrencies. We noted in the news that the country of Turkey has just banned the use of cryptocurrencies for payment due to the difficulty in regulating them and ensuring the safety of payment systems.
What Will Bitcoin Be Worth in 2030?
If you read the hype about bitcoin and other cryptocurrencies, you are told that bitcoin could rise without limits to maybe a million dollars for each digital token. Although a bull market could take bitcoin and others much higher, with each step upward, the likelihood of regulation increases. When we look back at the dot com bubble, we remember folks saying that the stock market had changed forever and would just keep going up. The same happened when the Hunt brothers tried to corner the silver market. When FOMO takes over, fresh money jumps into a market drives things up one more step before all of the old money gets out and there is no bottom to how far an asset, like bitcoin, can fall.
Long Term Place for Cryptocurrencies
The original idea for bitcoin, as a medium for exchange is a good one. We expect governments to try to lead cryptocurrencies in this direction and away from being speculative assets. To do this, there will be regulation. There may be a way to tie crypto prices to something more tangible than hope of future rallies. If bitcoin is still around in 2030, we expect it to be a totally different animal than it is today. How about a medium of exchange tied to a basket of currencies and worth $5,000 each?
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Crypto With Best Profit Potential
Who would have thought back in 2013 when bitcoin sold for a little over a dollar that it would be worth $60,000 today? While a lot of old-school investors think that bitcoin is a giant bubble waiting to pop, others have gained impressively by putting moderate investments to work in cryptocurrencies. Assuming that the crypto niche will not collapse and that it will continue to be viewed as a store of value, what is the crypto with the best profit potential? Do you really want to buy a bitcoin for more than $60,000 in hopes that it will double in price or would you rather buy one ETH (ethereum) for a little more than $2,000 with the rationale that ETH has better profit potential at this point?
What Are Cryptocurrencies?
Cryptocurrencies date back to 2009 when bitcoin was invented. Cryptocurrencies are virtual or digital currencies which are attractive to investors because they are essentially impossible to counterfeit. They are usually based on blockchain technology in decentralized networks. The ledgers for such systems are decentralized so that information is spread across multiple computer systems. Because of this setup cryptocurrencies are considered to be safe from government oversight, interference, or manipulation.
The original purpose of setting up bitcoin was to have an electronic means of buying and selling things and sending money. And, in the early years bitcoin was worth a few cents and then a dollar around 2013. As bitcoin took hold two things happened. Other cryptocurrencies were invented and investors started to buy bitcoin with the hope that they would make a profit. Bitcoin and other cryptocurrencies came to be seen as digital gold and an alternative to holding traditional currencies.
What Are Some Cryptocurrencies?
Following the growing success of bitcoin, other cryptocurrencies have come into being. Here are ten more cryptocurrencies to add to bitcoin.
- Ethereum (ETH)
- Litecoin (LTC)
- Cardano (ADA)
- Polkadot (DOT)
- Bitcoin Cash (BCH)
- Stellar (XLM)
- Chainlink
- Binance Coin (BNB)
- Tether (USDT)
- Monero (XRM)
Each of these has features that are somewhat different than bitcoin and some fill “gaps” in the cryptocurrency system. All of them are substantially cheaper than bitcoin. Investopedia has a nice, short review of these non-bitcoin cryptocurrencies.
Coinranking has a current list of cryptocurrency prices for more than 200 of these.
- Bitcoin: $61,165
- Ethereum: $2,394
- XRP: $1.66
- Binance Coin: $520
- Tether USD: $1
- Polkadot: $44
- Cardano: $1.40
- Dogecoin: $0.27
- Litecoin: $314
- Bitcoin Cash: $1,070
- Uniswap: $35
- Chainlink: $41
The list goes on and on but, as you can see, none of these sells for the same price as bitcoin. So, how have these done in comparison to bitcoin?
Crypto With Best Profit Potential
The point of investing is to gain profit and to protect your gains. You can buy one bitcoin or you can buy 30 ethereum for about the same price. What does the history of these cryptocurrencies tell us about what to expect? Seeking Alpha published an article saying that ethereum could eclipse bitcoin.
Ethereum is working off a smaller base which makes it more likely to outperform its larger peer. This is clear from the recent bull run. Bitcoin’s price is up 730% over the past 12 months, while Ether is up 1,290% over the same period. Bitcoin’s market cap has already surged past $1 trillion while Ether’s aggregate value is $242 billion.
They note that while ethereum has tended to track closely with bitcoin, it has more room to grow in terms of the value of one “coin” and in terms of total value. The same could be said for other “minor” members of the cryptocurrency field. MoneyWeb published a list of cryptocurrencies and their performance in the twelve months leading up to February of 2021. While Bitcoin went up threefold, Cardona went up twelvefold, Polkadot went up sevenfold, and both Chainlink and Ethereum went up by just under sevenfold.
Some of this likely has to do with the various useful features of some of the non-bitcoin cryptocurrencies. But, the “smaller” cryptocurrencies have more room to grow and have prices that will make them more attractive to the average investor.
Are Cryptocurrencies Safe?
The idea of having a blockchain-based medium of exchange is attractive and many banks and other institutions have been adopting blockchain technology. This will not go away even if the apparent bitcoin bubble bursts. It would seem that much if not the majority of the price of bitcoin is based on the belief that it is a profitable and safe investment. As the leader of the pack by such a large margin we think that it has more to lose if government regulation or other factors bring its price back down to earth.
We think that bitcoin and other cryptocurrencies as a medium of exchange (the original purpose) is valid and will continue. In order to protect consumers, there will be some degree of regulation and taxation of profits as we noted in an article about buying cryptocurrency. As the system matures society will demand that the various systems are accountable. Along the line we expect to see some of the “smaller” members of this group make up ground against bitcoin. This will largely be based on how well they fulfill their purpose as a medium of exchange but also on how good of a store of value they turn out to be. The take-home lesson is that there are a lot more cryptocurrencies to invest in than bitcoin.
If you want to try trading any of these to cash in on short term moves, your best bet is track market sentiment data as none of these has any measurable way to assess intrinsic value.
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Safe Legacy Energy Investment
Once upon a time you could invest in an energy company like Exxon, reinvest your dividends, and have a nice nest egg for retirement. Today Exxon has all sorts of issues to confront as the world pivots to renewable energy, electric cars, and the like. Where can you find a safe legacy energy investment that will pay dividends and be around when you retire? An old saying from the California gold rush days was that when everyone was trying to find gold, the money was is selling picks and shovels. With that thought in mind we suggest Kinder Morgan as a safe legacy energy investment.
Why It Is OK to Love Legacy Investments?
As the world moves forward, the money always seems to be in new technologies. But, as US News notes, it’s OK to love legacy investments too. They mention Coca Cola with its internationally known brand and Johnson & Johnson with its huge list of brand names like Tylenol and Band-Aids. “Legacy assets” are often written of a company’s balance sheet as they lose value. But, there are legacy assets that don’t become useless with time. The safe legacy investment that we are considering today, Kinder Morgan manages pipelines for moving oil and natural gas. These pipes stay in the ground, virtually forever, and are the backbone of the system for heating our homes and running today’s power plants.
Is Kinder Morgan a Safe Investment?
If you look at Google Finance, search for Kinder Morgan and choose MAX that goes back to 2011 you see that the stock traded in the $30 to $40 range when oil prices were high and fell to $13 in 2016 when oil prices collapsed. It traded around $15 to $20 until the pandemic hit. Today stock trades at $16.50 a share. It pays a 6% dividend. Folks like Seeking Alpha think Kinder Morgan stock is undervalued.
Kinder Morgan’s (NYSE: KMI) share price is still nowhere near where it was in mid-2015 when the company’s share price was almost triple its current price. That’s due to the company’s struggles around issuing equity and continuing growth. Despite that, as we’ll see throughout this article, the size and potential of the company’s asset base means the potential to drive strong returns.
Investing in a Natural Gas Transport Company
Natural gas is the cleanest fossil fuel and will likely be used into the far distant future to run power plants and heat homes. The 70,000+ miles of pipelines that Kinder Morgan owns and operates are an invaluable legacy asset that will not be replaced by new technology. They are the largest independent transporter of refined products and the largest operator of terminals at 144.
Seeking Alpha thinks this stock is undervalued.
Kinder Morgan has an impressive portfolio of assets and the company’s fee-based model with more than 90% reliable cash flow is impressive and worth paying close attention to. Going forward, Kinder Morgan will continue using its strong cash flow to reward shareholders. Strong buybacks and dividends will provide the company nearly 8% annualized.
This company should not be the only investment in your portfolio but it appears to be a viable and safe legacy energy investment for the long term.
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Best 5G Investments
As technology advances, we are moving to a 5G world. So, what are the best 5G investments for your portfolio? To get this right, you need to look at what products and services will benefit from the advance into this new technology. 5G smartphones will become part of the mainstream of handheld devices in 2021. The infrastructure to carry this technology is going to go into place everywhere. And, Biden’s infrastructure proposal includes bringing broadband and all aspects of advanced internet technology to all corners of the USA. We have pulled together several recommendations for the best 5G investments going forward.
What Is 5G?
Wireless technology for mobile devices has been steadily improving over the last four decades. It started with 1G in the 1980s when mobile phones cost as much as $4,000. By the 1990s there was 2G which allowed users to send tech messages. 3G came on the scene in the early 2000s. This technology is still used in many of today’s mobile phones and allows for significantly great data transfer than earlier generation technology. This was when video calls became possible as well as internet connectivity and file sharing. We have had 4G since 2009. It is significantly faster than 3G allowing for streaming of media. The first 5G came out in 2018 but was not in wide use. It is significantly faster than 4G and will usher in the true internet of things, more and more big data, and even smart cities. The “5” simply means that it is the fifth generation of improvements.
What Is The #1 5G Stock?
If you are looking for the best 5G investments and a handsome profit, you need to look at companies that install, use, and advance 5G and also companies that will benefit from the advent of 5G. CMC Markets writes about Qualcomm, Ericsson, Nokia, and Verizon, all of whom will be 5G providers. The Motley Fool writes about Qorvo and Marvel Technology Group who will provide technology and other services to the big 5G suppliers. Although all of these may be good investments, we vote for the folks who provide important niche technology and services overall suppliers for 5G as the best 5G investments in 2021 and going forward.
Qorvo or Marvel Technology for Investing in 5G
Qorvo is a maker of RF (radio frequency) chips. These let smartphones connect to the internet and wireless networks. They supply these chips to smartphone makers like Apple, Vivo, Samsung, Xiaomi, and Oppo. This was a $50 stock five years ago and a $191 stock today. Marvel Technology Group offers networking products that are basic to how 5G smartphones work. Their main customers are Nokia and Samsung. This was a $10 stock five years ago and sells for $49 a share today.
Qualcomm, Ericsson, Nokia, and Verizon for Investing in 5G
Qualcomm is a leading 5G technology supplier that has tripled in value over the last five years. Ericsson is a telecommunications giant with a strong presence in providing 5G technology across the globe. Their stock price has tripled since October of 2016. Nokia is only slightly behind Ericsson in providing global 5G technology. Their stock has fallen from $6 a share to $4 a share over the last five years. Verizon controls a third of the US telecommunications market. Its share price has gone from $50 to $58 over the last five years.
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Investing Mistakes to Avoid for Beginners
Investing in the US stock market has been a reliable way to increase your wealth and gain a secure retirement for as long as there has been a US stock market. Over time stocks have outperformed other investments. But the market goes up and down. So, the most reliable profits come from investing for the long term. Unfortunately, many new investors are lured into bull markets with the idea that profits are easy and assured. This is just one of the investing mistakes to avoid for beginners.
What Are Some Common Investing Mistakes?
Jumping into a bull market when it is ready to correct is an all-too-common mistake that novice investors make. That mistake is typically followed by waiting to sell until the bottom of the correction. Both of these mistakes fall into the category of not understanding the investment. Falling in love with a company and then hating it is often part of why this happens.
Not Being Ready to Invest
We have written several times about how to start investing in the stock market. As we have noted numerous times, you need to be ready to invest. That preparation starts with paying off credit cards, buying your home instead of renting, and setting up a rainy day fund for three to six months of expenses. Then you need to learn how to pick stocks or ETFs and at what rate to put money into the market. Dollar cost averaging is an excellent way to put money into investments as you will not get tempted to put all of your money into a high-priced stock and have none left over for bargains.
Not Thinking About What Your Risk Tolerance Is
The new craze among new, young investors is to use an app like Robinhood to buy and sell stocks online without any commissions (but not always at the best prices). Unfortunately, too many get sucked into options trading because they see something on Reddit. There are even reports of millennials taking out second mortgages on their homes in order to trade options. This is gambling instead of investing. The point of investing is to put your money where it will grow due to interest paid or the growth of a company listed on NASDAQ or the NYSE. If you cannot afford to lose the money you are investing, you have no idea about your risk tolerance.
Not Understanding an Investment
We have repeatedly noted that learning how to assess the intrinsic value of an investment is a key to success. Long term investors look for companies that will make money in the future and constantly improve their ability to do so. Short term traders look for hiccups in the market and attempt to predict and profit from short term price changes. It is possible to make money by either approach but it is necessary to understand the dynamics in both cases. While intrinsic stock value is important to long term investing, market sentiment data is essential for short term investors.
Impatience
You can make money in the stock market over time by picking good investments and being patient. Impatience generally leads to failure in your investing. It takes several forms. Novice investors jump from investment to investment trying to time the market and cash in on price swings. Fees and commissions along with short term capital gains taxes eat up whatever profits they might make, providing that they don’t simply lose money at every turn. Market timing is difficult and successful long term investors typically avoid it. The flip side of impatience is staying with a failing stock until it “catches up.” If you learn how to assess intrinsic value you will know what this approach is doomed to fail.
How to Avoid Investing Mistakes
Start investing after you deal with credit card debt and own your home. Then set up an investing plan. Experts like Warren Buffett suggest putting your money in an ETF that tracks the S&P 500 or one of its major sectors. You can invest in individual stocks but then you will need to devote time to tracking their performance. Using dollar cost averaging is a good way to put money into the market and buy more stocks for your money when prices are low and avoid paying too much when prices are high.
Make sure that investing is part of your life plan. That means allocating money for fun, for your rainy day fund, and other things that make life worth living. Set up a retirement plan like an IRA, fund that separately, and never “borrow” from your retirement plan to speculate in the market!
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3 Reasons for Infrastructure Investments
The Biden infrastructure and jobs proposal has been launched. Getting the $2 Trillion proposal through Congress in one piece may be difficult but should not be impossible as every member of Congress would see benefits of spending, jobs, and infrastructure improvements in their districts and states. The sorry state of US infrastructure is touted as the reason we need such a plan and so much spending. But there are really three reasons for infrastructure investments which are high unemployment, dead end jobs, and infrastructure in need of fixing.
Why Invest in Infrastructure?
The Brooking Institution makes the case that the USA has three major problems of which infrastructure is just one.
As COVID-19 continues to take a toll on the economy, America faces three interrelated challenges: (1) high unemployment alongside a historically low reemployment potential; (2) a precarious labor market with too many low-wage, dead-end jobs; and (3) large infrastructure gaps that hamper productivity and growth.
So many skilled, middle-class jobs have left the USA over the years as work has been sent offshore or taken over by automation. The Covid-19 pandemic has gutted the service industry and many companies have found that they can replace workers with computer programs. Thus, skilled trade and factory jobs which turned into gig service jobs are going away as well. The benefit of so many infrastructure projects is that they require the sort of skilled workers that the USA once had so many of. These projects employ US workers and cannot be done in foreign shops by foreigners. The point that The Brookings Institute makes is that by investing in infrastructure we will create jobs and jobs that will last. And, those jobs will be skilled jobs with better pay. And, on top of that, we will get to fix all of that broken and out of date infrastructure!
How Do Infrastructure Investments Pay for Themselves?
The leading argument for why Congress should not pass Biden’s infrastructure and jobs proposal is that he will be raising taxes to help pay for it. The work as envisioned will take eight years or more to complete and higher taxes by themselves will cover half of the cost during that time. If these projects were to provide no further economic benefits (and higher tax revenues) it would take 16 years to pay for the Biden proposals. But, infrastructure work that is properly planned and executed does pay for itself many times over in increased efficiency, more jobs, economic growth, and higher tax revenues.
Investing in Bridges
An excellent example is the Brent Spence Bridge that crosses the Ohio River from Cincinnati to Northern Kentucky as noted by NPR. More than a billion dollars worth of freight crosses the bridge on I 75 every day, connecting businesses from Michigan to South Florida. The bridge was declared obsolete in 1980 (40 years ago), is constantly backed up by a couple of miles and has had part of it FALL OFF over the years.
Repairing the bridge and building a new one alongside would cost $2.6 billion over several years. Northern Kentucky University did an economic benefit or cost-to-benefit analysis of this project considering just local factors in Ohio and Kentucky. Their study sheds light on how spending on such a project has direct and induced effects as well as a multiplier result. The project would create more than 24,000 jobs over a ten-year period, $1.9 billion in labor income, and nearly $200 million in additional state and local tax revenue. Here are the factors that they used to assess the project.
Direct impact: revenues or income of businesses or operations including labor, parts and supplies, property and property improvements and so on.
Indirect effects: additional employment, labor income or output within the region which is the result of business spending, such as the purchase of advertising services, cleaning services, vehicle purchases, etc.
Induced effect: additional employment, labor income or output within the region which is the result of employee payroll (labor income) spending, on items such as utilities, medical care, groceries, childcare, etc.
Total impact: the sum of the direct impact, indirect effect and induced effect.
Output: is defined as the additional economic activity and spending in a region
Employment: the number of full and part-time jobs
Labor income: wages or pay plus benefits earned by individuals in the region
Multipliers: quantify the “ripple effect” of industry spending and jobs. Each industry sector has its own effects on the economy. For example, hospitals spend more on laundry services than grocery stores. Average pay also differs by industry, and more highly paid employees spend more on groceries, cars and so on than employees with lower pay. IMPLAN (the analytic system they used) provides multipliers on more than 400 detailed industry sectors.
This was an analysis of local factors and did not take into consideration increased federal tax revenues or the effects on businesses in the Michigan to South Florida corridor of improvement of this Ohio River Bridge. The bottom line is that fixing things like an economically important bridge (as opposed to a “road to nowhere” pays for itself. It does so with direct, induced, and multiplier benefits during the construction phase and then with economic efficiency for decades thereafter.
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Where Will Biden Infrastructure Money Go?
President Biden just introduced his proposal for a $2 Trillion plan to rebuild and modernize American infrastructure and to create American jobs. If this proposal passes Congress in its proposed form, it will provide many investment opportunities along with being the biggest domestic US investment since the Johnson years. There are three issues at the core of this proposal. One is to finally start fixing the broken roads, bridges, airports, and mass transportation systems in the USA. The second has to do with things like universal broadband and 5G access for everyone. The third is all about creating jobs and bringing back jobs that have been sent offshore. Paying attention to the details of this plan will help investors profit as this goes forward.
Where the Biden Jobs and Infrastructure Money Will Go
USA Today published a concise and informative rundown of where the Biden jobs and infrastructure money will go.
His far-reaching American Jobs Plan includes spending to repair aging roads and bridges, jump-start transit projects and rebuild school buildings and hospitals. It would also expand electric vehicles, replace all lead pipes and overhaul the nation’s water systems.
And, the proposal is a jobs program to build a “clean energy workforce” along with expanding domestic manufacturing. It also targets caregiving of the aging US population. Here is a “big picture” breakdown.
- $621 Billion for transportation infrastructure-roads, railroads, bridges, electric vehicles
- $650 Billion to fix water systems, expand broadband, repair schools, public buildings
- $400 Billion to expand caregiver access to elderly and disabled
- $300 Billion to research, development, and domestic manufacturing
We wrote about top infrastructure investment opportunities. The actual proposal provides more details for investors.
What Is Infrastructure?
This word is used a lot these days but what is it? Infrastructure includes physical technologies and structures, organizational structures, and facilities that are needed for a society to function effectively. Thus, roads and mass transit systems fall into this category as do water systems, caregiver access for the elderly and disabled, and programs to keep the US at the top of scientific research and development.
The Sad State of Infrastructure In the United States
The USA has a $20 Trillion economy that relies on infrastructure like the interstate highway system that was put in place decades ago. Too many of these systems have been neglected. We see on the news that a bridge in a major city collapses but with today’s twenty-four hour news cycles we forget until the next disaster happens. The Council on Foreign Relations provides a useful review of the sad state of American infrastructure.
The $20 trillion U.S. economy relies on a vast network of infrastructure from roads and bridges to freight rail and ports to electrical grids and internet provision. But the systems currently in place were built decades ago, and economists say that delays and rising maintenance costs are holding economic performance back. Civil engineers raise safety concerns as well, warning that many bridges are structurally deficient and that antiquated drinking water and wastewater systems pose risks to public health. Meanwhile, Americans’ international peers enjoy more efficient and reliable services, and the U.S. lags behind other developed countries in infrastructure spending.
The Biden proposal aims to remedy increasing shortfalls in our infrastructure in order to increase American efficiency and competitiveness, bringing jobs back to American soil for the first time in generations as well.
What Investments Will Benefit from the Infrastructure Bill
Market Watch looks at stocks that could go up 41% in a year due to the Biden infrastructure and jobs plan. Their article lists individual investments and suggests using the Global X U.S. Infrastructure Development ETF PAVE as an easy way to get in on the coming infrastructure-related boom.
Risk-adjusted Investments for the Next Decade
Interest rates are edging up. For the time being, stocks are staying ahead of bonds in the investment war. Historically, stocks earn 3.3% more than bonds over time. However, investors have gotten used to a much better ROI in the stock market over the last decade. We are looking at risk-adjusted investments for the next decade as interest rates go up and the stock market adjusts. Many investors have chosen to invest by buying ETFs that track the S&P 500. This puts them at risk in a stock market that will perform differently over the next decade.
Stock Market Returns Looking Back
When the stock market is roaring upward like it did in the last decade or if plunging downward like in 2009, many investors forget that returns over the long term are predictable. With exceptionally low interest rates, the stock market has done very well from 2010 through 2020 even with the Covid-19 pandemic. The S&P 500 has returned as much as 32% in a single year.
Since the inception of the S&P 500 in 1957, returns have averaged 8% according to Investopedia. However, that average return since the S&P 500 went to 500 stocks includes lots of ups and downs.
The point for investors is not to get lulled into a sense of complacency because of the uniquely high stock market returns of the last decade during with interest rates have been extremely low.
Stock Market Returns Going Forward
Market Watch published a useful article about the next decade for stocks.
Though the U.S. stock market may win its current battle with the bond market, it could lose the war. Based on a simple regression model built on the historical relationship between stocks, bonds, interest rates, and inflation, investors can expect stocks to perform about 3.3 percentage points better than bonds annually over the coming decade. But that doesn’t mean equities will produce a return that is anything close to their historical average.
When the dot com bubble was ready to burst, the story was that investing had changed and that the market would go up forever. When the bubble burst, S&P 500 returns fell to negative 21% for a couple of years. That would be a real shock today for folks who have gotten used to making 31% and 18% in 2019 and 2020.
The risks going forward are these. Lots of zombie companies accustomed to low interest rates will go out of business. Their stocks will be worthless and their creditors will be holding worthless slips of paper. The market as a whole will correct downwards and then proceed at a slower pace than during the last decade. But, does this apply to all stocks?
Risk-adjusted Investments for the Next Decade
While travel and hospitality stocks took a hit during 2020, tech giants flourished as business continued with people working from home. Bank of America bought 30,000 laptops with all of the necessary security software for home-based workers. Multiply this by companies across the country and you have Apple, Microsoft and the rest doing well despite the economy doing its worst since the Great Depression. Amazon prospered and hired lots of workers while brick and mortar stores went out of business.
We have written about adapting your investments to the Biden agenda and push to revamp American infrastructure. The “low hanging fruit” we mentioned in our most-recent infrastructure article have to do with companies that provide aggregate, steel, and equipment rentals, all of which will prosper when American rebuilds its roads, bridges, ports, mass transit, and airports. But, a huge concern today is America’s dependence on international supply chains for materials critical to our economy and defense. As such, we expect to see the high tech sector continue to prosper as the USA seeks to reassert its technological dominance.
The average S&P 500 ROI will probably fall as interest rates go up but individual S&P sectors and selected individual stocks will be excellent risk-adjusted investments for the next decade.
Risk-adjusted Investments for the Next Decade – Slideshare Version
Top Infrastructure Investment Opportunities
The US economy is going to grow nicely this year as it comes back from the Covid-19 shutdown. Investments in the recovery will continue to do well in the coming years if they are focused on American infrastructure. What are the top infrastructure investment opportunities for 2021? You need to think about what materials and technologies will be used to repair and advance infrastructure. And, then you need to look for the companies best positioned to profit from a broad range of projects.
Best Infrastructure Stocks
We found a set of good suggestions about infrastructure stocks to buy from The Motley Fool. They did not look for the newest technologies but rather the folks who can profitably supply materials and equipment. The three stocks they suggest are Vulcan Materials, United Rentals, and Nucor.
Vulcan Materials is the biggest producer of aggregate in the USA. They provide gravel, crushed rock and sand used for construction of bridges, buildings, highways, runways, and more. Their stock sold for $136 a share before the pandemic, fell to $109 and now sells for $145. It has a 0.90 percent dividend yield which is four times what it was six years ago. They are not going to grow by multiples but will see impressive profits as the country gears up to fix everything that needs aggregate and concrete.
United Rentals is the largest renter of heavy equipment in the world. Although folks like Caterpillar should do well as more heavy equipment is needed, many companies will choose to lease equipment for as long as they need it instead of purchasing. Their stock sold for $156 a share and fell to $70 before climbing to $316 today. The only problem we see with this choice is that much of the profit may have already been made as their business has ramped up in anticipation of the recovery and infrastructure projects.
Nucor is a very efficient steel producer and the largest in the USA. Their extremely efficient mini-mills use electric furnaces making them highly profitable. The Biden infrastructure program will have two purposes. One is obviously to fix a lot that is broken in our infrastructure as well as to introduce advancements that are long overdue. The other is to create lots of American jobs. As such, we expect any legislation that funds infrastructure programs to give preference to American companies and suppliers. This could provide the basis for a turnaround for American steel producers with Nucor leading the pack. Their stock sold for $47 a share going into the pandemic, fell to $30 and sells for $71 today. We do not think they are anywhere near topping out at this time.
Types of Infrastructure Investments
Traditional infrastructure investments are in roads and highways, mass transit, ports and waterways, airports, electricity, and water services. All of these are critical and all are likely to be addressed in the coming legislation. However, technological infrastructure is important as well. We wrote about 5G investments but there are also basic things like having enough masks, syringes, and other essentials produced and stockpiled in the USA should the pandemic come back. We wrote about how batteries are essential to clean energy and how the USA is likely to start mining rare earth minerals in the country and building lithium-ion battery factories at home.
Ways to Invest in Infrastructure
Choosing individual stocks can be profitable if you have done your research. But, many investors have done just fine in recent years by putting their money into ETFs that track the broader market or, in this case, infrastructure-related investment opportunities. Three good choices are PAVE, IFRA, and NFRA. They all track a broad set of companies that work in infrastructure-related areas. Invest in an infrastructure ETF if you want to skip the research.
Top Infrastructure Investment Opportunities – Slideshare Version