- November 17, 2015
- Category: Investment
Creating lasting wealth requires investing your money wisely. Whether you’re new to investing or you are a seasoned pro, 2016 will bring a host of options that can help you to yield significant returns.
With 2016 looming on the horizon, investors at all levels of market involvement are in hot pursuit of the investment tips, trends, and nuggets of wisdom that can help any speculator to net high yields. Those who are risk-averse or downright fearful of losing money in the market, in real estate, or in precious metals, are acutely focused on the investment opportunities that balance moderate gains with contained risk. While there is no crystal ball in play here, and the future will always be full of surprises, there are some reliable market indicators that can be used to make safer, more lucrative investment choices going forward. In this guide we will focus on the past and future performance potential of stocks, real estate, and precious metals, as well as various retirement investment options, in order to determine which path is right for you.
The Stock Market
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson
All things equal, the stock market is an investment arena that sees quite a lot of volume. The NASDAQ (North American Securities Dealers Automated Quotations) drives between $60 and $100 billion dollars per day in actual dollars traded. All of this volume can equate to high earnings – but significant gains are often offset by losing investment. Over the past ten years, the NASDAQ composite has delivered a 139.93% return on investment. While the S&P500 has recorded a 75.4% return over the past five years.
Both of these ROIs are certainly formidable, but the important question is – what does 2016 look like?
The casual researcher who relies on Internet-based articles will see a litany of postings with titles that start like this – “The big bubble is about to burst,” or “Cash out now and save yourselves!” While there will always be doom and gloom journalists and professionals in the market, poised to earn clicks on their websites through catchy and disconcerting article titles, the real professionals are often much quieter and more calculated in their approach. Take the words of veteran investment guru Jeremy Grantham, himself a renowned professional investor – “Around the Presidential election or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse.” That could spell disaster for those who have large sums of money invested in the market.
Beyond election year woes, most analysts believe that the energy sector will continue to see valuation losses. According to commodities futures for West Texas Intermediate crude oil – long considered a market benchmark, oil will continue to drive down stock prices in this sector. So energy will be a tough market in 2016, with some possibility of a rebound in late 2016, according to some experts. Another problematic industry within the stock market realm is cable television providers. Their continual irrelevance in today’s streaming world has caused serious declines in stock market valuation.
When considering an investment in the stock market, one key indicator to watch is interest rates. When rates rise, stock market prices are often reanalyzed. According to Warren Buffet of Berkshire Hathaway – “If we get back to normal interest rates, stocks at these prices will look high.” He recently delivered this message to a shareholders meeting, where he discussed his personal forecast for stocks in 2016. The Fed has indicated that a rate hike will be in the near future, which may create problems from within the stock market.
The Verdict: Stocks should always comprise at least part of your portfolio, but be prepared for the wild valuation swings that can occur when major events happen around the globe. Elections, weather issues, terrorism, monetary policy changes, and more can influence the stock market, and that can spell disaster for any investor. 2016 may see added volatility in the stock market due to upcoming elections, Fed interest rate changes, and continued instability around the world. Be cautious in 2016, and ensure that you maintain a diversified portfolio.
Real Estate
“In real estate, you make 10% of your money because you’re a genius and 90% because you catch a great wave” – Jeff Greene
The past five years have seen unprecedented levels of growth and activity within the real estate market. The “wave,” if you will, has certainly created an investment opportunity that is driving nice yields, and the average investor has a few options today when looking into real estate. The first approach is a “fix and flip” method, where the buyer purchases a distressed property and then fixes it up for sale. This avenue is not as popular as it once was – mainly attributable to the lack of inventory of fixer-upper homes on the market today. 2016 may see even lower levels of inventory, making this quick turnaround option less available to investors. This can also be a risky move as most investors must front a large sum of money for the home purchase, repairs, real estate fees, and more.
The second option is to purchase a home and convert it into a rental property. According to the Real Property Management franchise, all key indicators point to a thriving rental market that will likely continue into 2016. This means that those who intend on purchasing a property that will eventually be used as a rental unit can anticipate low vacancy rates, higher than normal rental rates, and generally strong demand. Nearly a quarter of all single family homes in existence today across the US are used as rental units – 24.98% to be exact, up from 23.6% last year.
Yet another investment opportunity that is related to the real estate market is the REIT, or Real Estate Investment Trust. Essentially, a trust organization will purchase a piece of real estate (often dozens of properties to ensure diversification) and then rent it back to the retailer or business who needs physical space. Sears is a great example of an organization who is now using REITs to generate upfront cash in exchange for lease-back agreements with the real estate investment trust. For the average investor, shares of a REIT are available – similar to purchasing shares in a mutual fund. This allows for any investor to own a small share of the REIT, and they can choose the industry in which they’d like to invest.
While these investment opportunities can be fairly lucrative, they tend to swing wildly year over year. For example, Vanguard’s VGSIX REIT fund returned 2.31% in 2013, 30.13% in 2014, and is posting a loss of 4.45% year-to-date through September of 2015.
In terms of a real estate forecast for 2016, most analysts foresee a gradual climb in rates. While some investors or potential buyers will scoff at the notion that a 5% home interest rate is considered “high,” keep in mind that the concept of home affordability is key. If the price of a home increases 5% between now and 3Q 2016, and the average 30-year mortgage rate increases by 100 basis points to 5%, buyers will see an 18% increase in their average monthly payment. This concept can seriously hamper the appreciation potential of the average home, while keeping investors out of the market due to an inability to afford subject properties. The real answer lies in enabling household earnings to rise along with the heightened home prices – but that doesn’t seem likely either. According to the Chief Economist at Freddie Mac: “Rising rates and continued house price appreciation will squeeze affordability even in today’s low cost markets. Housing looks strong enough to weather moderately rising rates, but we need real income growth to support home buyer demand.”
The verdict: Real estate is a proven investment option for many, yet its affordability is becoming more and more of an issue as we approach 2016 and beyond. Rising interest rates, minimal market inventory, and a rental market that is quickly becoming unaffordable for the average renter may take some of the steam out of the real estate market. Investors are now aggressively looking towards multi-family building opportunities – the Commerce Department just reported a 17% surge in this building sector in the month of September 2015. For the average investor today, real estate can provide moderate yields with average risk, but it is best left to those who view it as a long term investment proposition.
Gold and Precious Metals
“The desire for gold is the most universal and deeply rooted commercial instinct of the human race.” — Gerald M. Loeb
Many investors consider gold to be the benchmark for responsible investing. After all, it has been the base currency of choice for nearly all civilizations throughout history, and it retains its value like virtually nothing else on the planet. Consider this concept – a one-ounce gold coin was worth about $20 in the 1920s. That may have bought a custom-tailored men’s suit back then. That same one-ounce gold coin would be worth about $1,150 in 2015 – still plenty of money to purchase a custom suit. A $20 bill, on the other hand, would support the suit purchase in 1920 but wouldn’t even make a dent in the custom offering in 2015. Gold retains and increases in value over time, and that makes it an interesting, exciting, and relatively safe investment for those who favor long-term investing with consistent returns.
Why invest in gold? Gold’s value can ebb and flow, but unlike a business or government, gold cannot declare bankruptcy. It is a naturally-occurring element that is of finite supply – thereby ensuring value. It is universally accepted as a means of currency and is an asset that has value anywhere on the planet. Gold can also deliver incredible yields for investors who focus on both short and long term positions. For instance, investors in the late 1970s saw 98% returns in a 12 month period, while some witnessed 28% from 2009 – 2010. The average rate of return for gold is much more conservative than 28%, 98%, and beyond, which makes it the ideal investment option for those who are looking for a place to invest retirement funds.
According to recent research by the Pew Foundation, the top three national concerns among American citizens who were polled are – Terrorism (75%), the Economy (74%), and Deficit Reduction (64%). This concern over our domestic financial situation, combined with a global outlook that is perceived as instable, can contribute to the type of market uncertainty that drives down the dollar while positively impacting the price of gold and other precious metals. 2016 may see more severe market volatility than we are accustomed to – especially considering that it is an election year, interest rates will likely rise, and global terrorism and other disruptive events continue to plague the 24-hour news cycles.
The Verdict: Tangible assets like gold have been used as a reliable hedge against market volatility, and can help investors to responsibly diversify their portfolios. Investors can purchase physical gold, or opt for a Gold-IRA, or Individual Retirement Account, that holds gold and other precious metals instead of paper assets. Like any investment option, it may be a significant part of your portfolio – but not necessarily the entire account. Gold and other precious metals (like silver, palladium, or platinum) are reliable and responsible investment vehicles that have been used for centuries.
401(k)s and IRAs
The venerable 401(k) and Individual Retirement Accounts (IRA) should be part of any investor’s portfolio. Many company-sponsored 401(k) plans offer pre-tax deductions directly from the investor’s payroll, and a fair share include an employer’s contribution that can create a compounding effect on the investment over time. One comforting aspect of these plans is that they are structured and well-regulated, meaning that there are few surprises when it comes to contribution limits and other key terms. Due to a lack of federal Cost of Living Adjustments for 2016, 401(k) and IRA contribution limits will remain flat.
In terms of return on investment and overall yield, these accounts are generally invested in a variety of funds that can deliver a wide range of performance results. Many investors these days are opting for a Gold IRA account, which uses the long-term stability and inherent value of physical gold as a hedge against devaluation. These self-directed retirement accounts deliver additional diversification and use gold and/or other precious metals to protect against losses. For those who currently have an IRA or a former 401k, completing a hassle free rollover into a Gold or Silver IRA makes a lot of sense. With the energy market seeing a tumultuous future and the volatile nature of the stock market making investors nervous these days, holding physical precious metals makes sense for a risk-averse investor who values long-term appreciation and stability.
2016 is a bit of an unknown, but key market indicators hint that interest rates will rise, the housing market will cool, and stocks will continue to move in a volatile manner – especially those related to the energy sector. Gold may see minor to moderate increases in price, but more importantly it will continue to offer protection from anticipated Wall Street turmoil and tempered risk for the average investor. When you are ready to invest, or if you’re simply looking for a safer place to roll-over a 401k, transfer a TSP, IRA, or other qualifying retirement plan, consult with the experts at American Bullion today.
References:
http://www.businesswire.com/news/home/20151013005533/en/Housing-Statistics-Show-Rental-Rates-Continue-Rise
http://performance.morningstar.com/fund/performance-return.action?t=VGSIX
http://www.homebuyinginstitute.com/news/rate-forecast-slow-climb-639/
http://www.oregonlive.com/front-porch/index.ssf/2015/10/surge_in_new_apartment_buildin_1.html
http://www.cnbc.com/2015/04/01/
http://www.census.gov/construction/nrc/index.html
http://www.ncpa.org/pub/ba747
http://www.pewresearch.org/fact-tank/2015/01/28/budget-deficit-dropping-but-public-still-concerned/
http://corp.bankofamerica.com/documents/16307/0/capital_market_outlook.pdf
http://www.nytimes.com/2015/07/19/upshot/the-economic-forecast-for-2016-and-what-it-means-for-the-election.html?_r=0
http://www.miningmarkets.ca/news/jeffrey-christian-of-cpm-group-bullish-on-gold-post-2015/
Although the information in this commentary has been obtained from sources believed to be reliable, American Bullion does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice. American Bullion will not be liable for any errors or omissions in this information nor for the availability of this information. All content provided on this blog is for informational purposes only and should not be used to make buy or sell decisions for any type of precious metals.
