Does money still make money? A friend of mine was able to save $3 million, and at the age of 50 he retired believing he could live off of less than 4% interest on his savings. He worked with a financial advisor and carefully allocated his money into equities, bonds and treasuries. Unfortunately, during the last 10 years his nest egg has lost value, and the interest he was planning to live on has been nonexistent.
From 1961 to 2001 Treasury Bills gave an average annual yield of 5.99%, and today an investment in treasury bills will provide investors with a .03% rate of return. From 1961 to 2001 the S&P 500 gave an average annual yield of 12.59%, and during the last 10 years the average was 3.46%. Overly complicated business models and a lack of transparency have further hindered the ability of many publicly traded companies to provide shareholders healthy returns. Examples of what appeared to be healthy, well-run businesses include Enron, World Com, Bear Stearns, Lehman Brothers and AIG. Most recently even JPMorgan Chase did not properly understand the risk it was taking and lost $2 billion on a risky gamble.
Instead of placing bets in the stock market, I propose that individual investors begin working to find ways to invest in hard assets that produce cash independent of the Wall Street mess. Real asset private placement investments can replace some of your Wall Street investments while still maintaining a diversified portfolio.
Legendary investor and George Soros’ cofounder of Quantum Fund Jim Rogers recently spoke on this topic in a radio interview with Opalesque.
“I personally invest in real assets,” he said. “If the economy improves I’ll make money because the demand for those assets will increase. On the other side, when governments get in trouble they print more money, and when they do that you can protect yourself by owning real assets.”
For exposure to natural resources I suggest investors buy partial ownership in oil and natural gas wells. You can invest in direct ownership in U.S. based oil and gas wells through a direct participating partnership. Risk adverse investors should focus on finding developmental drilling programs as opposed to highly speculative wild-cat exploration programs. Drilling programs offer significant tax deductions, in some cases as much as an 85%-100% income tax deduction in the first year of the investment.
For an asset uncorrelated to the stock and bond market I recommend investing in life settlement products. A life settlement is the sale of an existing life insurance policy to a third party. Life settlements are similar to zero-coupon bonds. They are purchased at discounts to their face value. The amount of the discount is based on the life expectancy of the insured and other factors. At maturity the new policy owner collects the death benefit of the policy from the issuing insurance company. The gross returns on life settlement policies are predetermined — the owner of the life settlement policy will collect the face value of the death benefit upon maturity of the policy. The rate of return is not determined until the policy matures.
Most policies are purchased at a discount that will yield low double digit returns over a large pool of life policies. You must buy into a pool because you never know exactly when an individual policy will mature. However, over a large pool of policies the average maturity date of all the policies is relatively predictable.
The returns on life settlements, unlike stocks, mutual funds, bonds and other investments are unaffected by market fluctuations, business cycles, the economy or global unrest. In other words, life settlement policies have no correlation to any other asset class.
To complement your technology stock portfolio I would recommend ownership in cell phone towers. Regardless of how the markets perform, the increases in demand for cell coverage will continue. Smart phones and a decrease in land line usage are driving the demand for more cell towers. Projects like cell towers are capital intensive and provide favorable returns to investors who are willing to make the illiquid investment. Once completed, an investment in a cell tower is similar to owning preferred stock with quarterly distributions.
Residential real estate
Another real asset that should be considered for a diversified portfolio is residential rental property. In an interview earlier this year Warren Buffet stated he wished he could figure out a way to buy a couple of hunded thousand residential rental properties.
Rental property have always been attractive to people looking for monthly income, because tax sheltered distributions come every month the rent is paid. In today’s residential rental market rental properties should return about 10% cash on cash. Remember that a 10% cash return on rental property will be partially tax sheltered. The tax advantages can be combined with diversification into multiple properties when you invest in a well organized private placement program that is buying many properties in the fund.
If you want to leave Wall Street behind, exploring the opportunities offered by private placement investments in real assets is a great investment arena to look into. Making investments in real assets a part of your portfolio is an option that I strongly recommend you explore.
Michael Roberts is a resident of the Chicago suburbs and has a degree in economics from the Miller School of Business at Ball State University. He is a Series 7, 22, and 63 Registered Representative with Alliance Affiliated Equities Corp. specializing in real asset investments. He invites questions or comments at (800) 453-5155 or by email at email@example.com.