Are Mobile Home Parks a Good Investment?

You may be included among the band of investors who are perfectly content to invest in various types of real estate opportunities but draw the line at mobile home parks as something your would consider getting involved in.

If you are looking for excellent tenant consistency, a high level of demand for your properties and a high capitalization rate that often beats the brick-built mainstream alternative, then you should at least consider the idea of casting aside your preconceived ideas about mobile home parks, as there is definitely money to be made.

The elephant in the room that needs to be spoken about in order to be able to discuss the opportunity sensibly is that mobile home parks are generally viewed as a place where the lower classes and criminal elements of society are likely to be found.

That perceived demographic and reputation is not entirely unfair and people renting trailers on many of the parks are more likely to be low-income or of a lower social class than you are going to find in some of the leafy suburbs in and around major cities in the states.

The impression gained by a number of investors that mobile home parks are a hotbed of crime and drug activity and the occupants are highly transient, will no doubt dissuade plenty of people to look elsewhere for real estate investment opportunities, but the facts and figures tell a different story in reality.

Every class of person has to live somewhere for a start and the idea that tenants come and go and frequent intervals, creating a nightmare of unpaid rents and empty properties, just doesn’t stack up when you look at the actual facts and figures.

Static homes and tenants

There is a fundamental difference between a trailer park and a mobile home park and the people on each type of site behave very differently from each other.

A trailer park is a scenario where a tenant could hook up their trailer and simply drive off into the night almost as and when they please, which would present a problem if they owed rent and other bills.

Residents in a mobile home park and living in a mobile home are in fact most of the time, anything but mobile. A more accurate description of a mobile home would be to call it a manufactured home and it is important as an investor to appreciate that this housing is built in a factory, delivered to the site, and rarely if ever moves from that location for the rest of its usable life.

It costs somewhere in the region of $3,000 to move one of these mobile homes, which is a huge amount of money to find for someone on a limited and low income. This is the primary reason why these tenants are far more likely to agree to a rise of between ten and twenty percent in their rent every few years than contemplate the idea of moving their home to another location, or moving at all.

Tenants on mobile home parks on average stay far longer than any tenant in private housing stock and they know that there are other people who would take their place if they had the chance, so they pay and stay, which is just what you want to hear as a landlord.

Half of the working U.S population earn less than $30,000 annually and many of them are in the sub $20,000 bracket. This means that the demand for affordable housing is almost guaranteed to stay high for the foreseeable future and that can only be good news for mobile home park owners, who will continue to enjoy full parks and regular income.

More for your money

The bottom line is a critical aspect of any investment proposition and you can measure the merit of an opportunity by calculating the capitalization rate.

This is a figure expressed as a percentage which you can calculate by dividing the current value of your rental property by the annual rental income you receive, less any expenses you have incurred. The average private sector landlord can hope to achieve a cap rate of about 6% after deducting costs such as maintenance and repairs, insurance and property taxes.

If you are the landlord of a mobile home park but not the owner of the actual homes on it, you will have fewer expenses to worry about and this can push the cap rate up to about 10% annually, so you can enjoy a better return on your money if you are prepared to look at this sector.

What about the economy?

You could easily get into a complicated debate about the current state of the U.S economy and what effect the economic outlook will have on your mobile home park investment, but the odds favor the argument that it doesn’t really matter what state the economy is in.

According to census figures, there will be at least 74 million citizens over the age of 75 within the next fifteen years and a fair number of these people will have minimal savings and live on a fixed income. When you consider that the average rent in the private housing sector is way beyond the $500 to $600 housing budget that many of this sector of the population will have at their disposal, they are going to have to make choice between a low-rent apartment or a much larger mobile home for the same money. Which one would you choose?

Even a booming economy is not going to make a difference to these readymade tenants who are on a fixed income and need to find somewhere to live that gives them the best standard and size of accommodation they can afford for their money available.

Low rents – big profits

It would be easy to look at the average rent being paid by mobile home tenants of about $300 per month and conclude that there won’t be enough margin in these figures to turn a decent profit each year.

The facts say otherwise and owners of mobile home parks are consistently making good money at rents this low. The typical expense ratio for a mobile home park is in the region of between 30% and no more than 40% of your gross revenue.

The reason you can achieve such good returns is primarily because as a mobile home park owner, you are renting land and therefore do not have the expense of capital improvements that a housing landlord faces.

Mobile home parks should be viewed as an affordable housing solution and delivers a stable tenant base for regular income. Looking at the demographics and financial performance of this sector, it is not difficult to come to the conclusion that becoming an owner or investing in one of these parks can be considered a reasonable investment opportunity.

How to Invest $100k in 2016

There’s a saying on Wall Street that alternative investments are Wall Street’s answer to the question, “Do you have an asset strategy that helps manage risks, offers equity-like returns, and is off the beaten path?”

That’s what alternative investments (think solar, wind, market neutral, futures commodities, hedge funds, and real estate, among other asset classes) bring to the table.

No doubt, alternatives are big business these days. McKinsey & Co. estimate the total size of the alternatives market at $7.2 trillion, with an annualized growth rate of 10.7%. That’s double the market size since 2005, and twice the growth rate of traditional investments.

Another report, this one from Price Waterhouse Coopers (PwC) estimates that alternatives will grow in size to over $13.6 trillion over the next five years. “Alternative asset management will undergo a transformation in the years to 2020 and beyond as it adjusts to a new operating and economic environment and moves toward center stage,” PwC wrote.

The End Game For Alternatives: Opportunity and Value

By and large, alternatives combine higher risk, higher return (relative to traditional investments like stocks) investments, professional management and, most importantly, have a low correlation to “old school” asset classes. This low correlation creates significant portfolio benefits through diversification (risk reduction) and return enhancement.

The end game for alternative investments is straightforward: to capitalize on market inefficiencies while neutralizing the overall direction of the capital markets and interest rates.

Risk management is a mainstay with any alternative investment fund.

Broadly speaking, the rationale for incorporating uncorrelated assets—those that behave differently for a given economic or market event—is that they may reduce overall portfolio risk and improve risk-adjusted performance,” American Century reports in a white paper on alternative investments. “This more balanced approach provides exposure to a number of different asset classes without leaving investors overexposed to any single area or segment of the market. Indeed, diversification works on the principle that by sacrificing some absolute return potential, you may reduce the risk you take by spreading your investment across asset classes.”

Your $100,000 Alternative Investment Portfolio

With risk management and diversification in mind (as well as appreciating asset value,) let’s build our own alternative investment fund, using $100,000 as seed money.

We’ll start with several different asset class categories: precious metals (gold), natural resources (oil), U.S. real estate investment trusts, emerging markets debt, currencies and hedge funds.)

Alternatives Used Most Often

$15,000 – Merk Hard Currency Investor (MERKX) $15,000 of $100,000 Portfolio – (-) 2.02% One-Year Return – This fund, with $117 million assets under management, seeks to profit from a rise in hard currencies relative to the U.S. dollar, according to SEC filings. “Under normal market conditions, the fund invests at least 80% of the value of its net assets (plus borrowings for investment purposes) in “hard currency” denominated investments,” the fund’s prospectus states. “The fund normally invests in a managed basket of hard currency denominated investments composed of high quality, short-term debt instruments, including sovereign debt, and indirectly in gold and gold-related securities. The fund is non-diversified.”

$10,000 – Guggenheim Managed Futures P (RYMFX) ($10,000 of $100,000 Portfolio – 10.6% One-Year Return – This Guggenheim fund is selling for $22 per share and has over $220 million in assets under management, in the managed future category. The fund seeks to achieve absolute returns,” the fund’s prospectus reports. “The advisor intends to invest in multiple proprietary and third-party investment strategies that seek to identify and profit from upcoming movements in any combination of global fixed income, currency, commodity, or equity markets. The fund will invest at least 80% of its net assets, plus any borrowings for investment purposes, in “managed futures.” It also may invest up to 25% of its assets in municipal securities.”MACROBUTTON HTMLDirect It has a “3” Morningstar risk rating;

$20,000 – ProShares Morningstar Alternatives Solution ETF (ALTS) $20,000 of $100,000 Portfolio – (-) 4.12% One-Year Return – ALTS is a good low-beta play, meaning it offers some stability in your $100,000  alternatives portfolio. The ETF tracks the performance of the Morningstar Diversified Alternatives Index, which allocates among a comprehensive set of ProShares ETFs that employ alternative and non-traditional strategies such as long/short, market neutral, managed futures, hedge fund replication, private equity, infrastructure or inflation-related investments, according to fund statements. There’s only $26 million in assets under management, leaving plenty of upside for investors, and offers an expense ratio of under 1.00% (at 0.95%).

$10,000 – Market Vectors Gold Miners (GDX) $10,000 of $100,000 Portfolio – (-) 24.72% One-Year Return – Gold certainly took a tumble in 2015, but 2016 could be a different story (gold prices are already up almost 4% early in 2016.)  Following suit, GDX share prices have risen by 5.8% in value for the first week of 2016. This is a big-time fund, with net assets of $4.2 billion, and it offers commodity-minded investors access to brand industry names like Goldcorp, Inc.; Newmont Mining; and Barrick Gold. The fund is selling at $13.97 per share in early 2016, making the fund a good entry point into commodities, and a solid addition to your $100,000 alternatives fund.

$20,000 – ProFunds Consumer Services Fund (CYPIX) $20,000 of $100,000 Portfolio – 6.76% One-Year Return – This trading leveraged equity fund has $54 million in assets under management, and offers investors daily investment results, before fees and expenses, that correspond to one and one-half times (1.5x) the daily performance of the Dow Jones U.S. Consumer ServicesSM Index, according to the fund’s prospectus. “The fund invests in securities and derivatives that the adviser believes, in combination, should have similar daily return characteristics as one and one-half times (1.5x) the daily return of the index. The index measures the performance of the consumer services sector of the U.S. equity market,” fund document report. This fund is  a durable performer, with 28.1% three-year returns, and 11% returns over the past 10 years. Investment fees are a tad high at 1.62% of assets, but it’s worth it to gain access to those steady returns.

$25,000 – Aberdeen Diversified Alternatives Fund (GASAX) $25,000 of $100,000 Portfolio – (-) 3.52% One-Year Return – We want a fund in our $100,000 portfolio that offers instance access to several alternative investment categories, and Aberdeen Diversified Alternatives Fund certainly fits the bill. The fund has $131 million total assets and a relatively low expense ratio of 0.52%%. This is a total return-oriented fund, and is built on a “fund of fund” platform, that seeks to meet its investment objectives by investing primarily in underlying funds and, to a limited extent, in direct investments, the fund’s prospectus states. The fund allocates its assets among a range of non-traditional or alternative asset classes to garner return from such non-traditional or alternative sources. It may invest directly in certain types of derivatives, for example, securities index futures or options, which may be used to hedge against a decline in the value of the fund’s assets, the fund reports.

An Alternative Approach To Portfolio Growth

As the number and quality of alternative funds grow, investors can expect to reap even more benefits of disconnecting from volatile stock markets.

If past really is prologue, expect alternatives to produce returns with lower risk correlations compared to traditional stock, bond and cash investments. That means stronger diversification and more robust risk-adjusted returns.

That should be music to the ears of investors looking for a different blueprint in 2016. For those market mavens, its alternatives to the rescue, with our $100,000 fund as a solid starting point.

Gold or Bitcoin: Which looks set to be the better investment for 2016?

You might say that comparisons between gold and bitcoin represent a clash of the old and the new, when it comes to investment opportunities.

Gold has long held a place in the minds of many investors who are looking to diversify their portfolio and provide a hedge against inflation and a safe haven in times of economic uncertainty. Bitcoin is a new technology and this digital currency is in comparison to gold, the new kid on the block.

The question that is worth asking is whether you should retain your faith in the staying power of the precious metal in turning you a profit, or whether you might be better served by concentrating on a digital currency to give you a decent return in 2016.

Mixed start for gold in 2016

Gold has traditionally been viewed as a safe alternative investment, when markets are jittery about challenging socio-economic conditions, and this was aptly demonstrated by the way gold prices behaved at the beginning of 2016.

Gold had managed to achieve a 20% rise this year in response to global economic malaise that truly looked liked a festive hangover and managed to wipe billions off stock values. No sooner had gold started to do what it normally does in challenging market conditions, when the gold price started to soften in response to a more dovish outlook from the Fed.

The US central bank was expected to introduce four rate hikes throughout 2016, but they subsequently lowered expectations to suggest that it was likely to be two rate hikes. The relevancy of this is that leaving rates on hold for longer would hit the dollar, against which gold is a hedge.

Shortly after had gold started to rise in response to central bank comments and news of the terrorist attacks helped generate further interest in the precious metal, the Fed suggested that an interest rate rise might be sooner than expected , which prompted a fall in the gold price.

March 2016 witnessed the first serious wavering of conviction amongst gold investors and a drop of 3% in a week, so what is the likely outlook for the rest of the year?

Profit-taking rather than a downward trend

There is some belief amongst gold traders that there are a lot of bets still running on gold prices rising further, and the recent falls are just a case of some investors taking profits.

The fact that gold has demonstrated decent resilience in being able to sustain a price above $1,200 in various circumstances and conditions, would seem to confirm that an upward trend in the gold price is set to continue through 2016.

Underlying economic concerns, combined with an accommodating monetary policy and better supply and demand conditions than there were in the last couple of years, could all conspire to give gold an upward price momentum.

If gold has managed to overcome its inhibitions and sheds its traditional negative correlation with the dollar, it could could carry on where it sits now after the first quarter of 2016, as the best performing asset class this year.

Gold as investment does tend to divide opinion and you will doubtless find plenty of opinions to suggest that it should not be part of your portfolio, but there are just as many voices who believe that the gold price rally might last the year.

If that is the case, how would an investment in bitcoin fare by comparison?

Bitcoin – The new shelter?

You didn’t have to look far for bad news and nervousness in 2015,  with the S&P barely managing to return 3%, oil virtually reaching the bottom of its own barrel with a 35% dive in prices and slowing growth in emerging markets, just some of the woes to weigh on investors minds.

As already alluded to, the traditional view has been to turn to gold as a safe haven option, but could bitcoin be a viable and more profitable alternative?

2105 was a good year for bitcoin, with a 44% rise recorded overall by the middle of December and in fact, the last six months of 2015, have witnessed an 80% rise in the price. That is a good year for any investment and those sort of numbers helped to put bitcoin on the radar of more investors. It also was a breakthrough year for the blockchain technology, with many major banks announcing that they were experimenting with the technology, although not bitcoin itself.

The problem so far with bitcoin, is that it has suffered from an image problem, but as government and law enforcement agencies start to accept that the digital currency actually poses a lower threat to spur dubious and criminal activity than first envisaged, the price has responded generously to the better reception.

It should pay not to forget that there is a definite sense of deja vu with bitcoin, as the price surged to $1,200 in 2013, only to fall back as doubts abouts its ability to stay the course surfaced. Bitcoin certainly has the innovative capabilities to become a mainstream investment option, and if the bitcoin versus blockchain debate is finally settled, the bitcoin price could definitely reach its previous levels and beyond.

To try and answer the question of whether gold or bitcoin would be a better investment. The answer probably lies in how you view the technology and whether you consider that public perception of bitcoin gains traction and remains positive.

If that turns out to be the case, then there is every chance that bitcoin could outstrip gold in 2016. The trouble is, do you want to pay to find out the answer to this question?

At least with gold, you are dealing with a traditional hedge that has an established place in the psyche of investors, so you have to decide what suits your own risk profile, when considering if bitcoin or gold could prove to be a better investment in 2016.

Which Are The Best Alternative Investments To Make For Your Children?

Time is a great healer when it comes to the performance of stocks and a number of financial products and patient investors who are in it for the long term can sometimes be handsomely rewarded.

Our children certainly have time on their side and if you are planning to set them up with a fund for when they reach their adult years or to fund their college and other significant life events, even a small regular amount can accumulate to a substantial figure by them time they reach their late teens.

Every $10 you invest from the day they are born to their 18th birthday would grow to about $3,000 if you manage to achieve at least 3% growth each year. Multiply that by the number you are planning to put away for them each month or as a lump sum and you can quickly see that there is every chance of accumulating a substantial sum, if you are patient and make sound investment decisions.

Our line of thinking has changed in recent years and rather than simply investing in a fund that invests in stocks, there are plenty of alternative investments available to spread your risk and diversify your portfolio.

Not every alternative investment would be suitable if you were investing for your child, so which ones should you consider?

Precious metals

Bearing in mind that your strategy when it comes to investing for your child’s future is about getting rich slowly as time is on your side, you can afford to take a long-term view on markets like precious metals.

Gold and silver have often been seen as a traditional hedge against falling stocks and economic or political uncertainty and although sentiment may have changed slightly in recent times, the price of gold for example, does tend to still follow a pattern of rising in value when stocks are falling.

Consider investing in a gold or silver exchange traded fund (ETF) or maybe investing in a few coins, although you need to be aware of the fact that there are two distinct types of coin to invest in.

Bullion coins are minted by major national governments but their value is fixed to the price of gold and are not collectible, so you are investing in physical stock and paying a commission when you buy and sell.

With a gold ETF you don’t own any physical gold yourself and it is commodity exchange traded fund which combines exposure to mining stocks and the price of physical gold, without actually owning any physical gold at all.

Gold or any precious metal investment shouldn’t be a major part of your portfolio but in terms of investing for your children, your patience can often be rewarded over time and exposure via something like an ETF does give your portfolio a bit of balance in times when the stock markets are performing poorly.

Real Estate

It is no coincidence that so many of the world’s wealthy individuals have substantial real estate holdings and if you are looking to secure a better financial future for your child, real estate investments can help you achieve this aim.

A real estate investment trust (REIT) is an extremely accessible way for individuals to gain an exposure to real estate. An REIT is setup to invest in a variety of different real estate properties and you may even be able to benefit from tax benefits depending on your circumstances.

You can purchase shares of REITs on public exchanges, which means you can enjoy reasonable liquidity, and they pay regular dividends which can be re-invested. REITs are considered to be one of the most liquid alternative investment available and could provide you with great growth prospects and a potentially positive return by the time your child reaches their 18th birthday.

Wine

It might seem a bit odd to invest in wine for your child but investors in fine wines have consistently achieved annual returns of between 6% and 15% over the long term.

Therefore, as a long-term strategy this could prove to be a profitable investment and provide a decent nest-egg for your child if you invest wisely.

Wine connoisseurs and collectors are renowned for their fickle nature so you will need to procure good advice on what to sell and buy for the best returns and you may need to buy in reasonable quantities in order to achieve a sizable return.

If you want to present your child with a decent financial start in life and start investing for them from an early age, alternative investments such as gold ETFs, REITs and fine wines are not a bad play and a viable proposition when compared to simply storing money away in a savings account or just investing in stocks.

Should You Invest in Bitcoin?

Bitcoin is the world’s most popular digital currency. In July of 2010, one Bitcoin sold for 4 cents.

Today, that price is over $400—and rising. Bitcoin’s meteoric rise from fringe topic to digital gold mine was—in the scheme of things—quite swift. Yet there are many who believe that the best is yet to come. Bitcoin is increasingly considered not only as a serious investment, but also as a hedge for a well-diversified investor.

Bitcoin as an Investment

Bitcoin has gained tremendous value in a very little amount of time—but it has also been subject to huge volatility. While those who bought at 4 cents and sold at the high of $1,000 might be millionaires, those who bought at the wrong time are still underwater. With huge price swings, Bitcoin investing has not been for the faint of heart.

What matters for those investing today is the likely value of Bitcoin in the future. The Winklevoss twins—famous for their lawsuit against Facebook, and big investors in Bitcoin themselves—estimate the total value of all Bitcoins will rise from today’s $6.8 billion to around $400 billion. That’s over 50-fold of upside potential.

Estimates like this generally assume Bitcoin will become a popular way to send and receive money, that it will be used as a store of value, or both. Whether Bitcoin will live up to these expectations is uncertain, but if Bitcoin achieves anything near mainstream success, a further appreciation seems likely. Digital payments service Paypal alone is worth over $40 billion, and Bitcoin transactions offer much lower fees.

If Bitcoin is instead valued like gold, as a digital store of value, taking a mere 5% share of gold’s $7 trillion market would suggest a valuation of $350 billion. Whether Bitcoin is valued as a payments system or an asset, evidence suggests there is room to grow.

Bitcoin is Revolutionary

Bitcoin is popular because Bitcoin is revolutionary. Bitcoin is not issued by a government subject to elections and political crises. Instead, it is underpinned by the blockchain, a decentralized ledger of every transaction. This technology is a true breakthrough, enabling nearly instant transactions with virtually no fees.

That’s why Goldman Sachs, JP Morgan, and others have joined a partnership to increase acceptance of the blockchain. Ironically, this development has led some to believe that Bitcoin was too innovative for its own good, and is thus destined to be a mere blueprint for future financial innovation. Others believe that the digital currency—already accepted by Overstock.com, Reddit, Dell, and other businesses, is too popular to go away.

Bitcoin as a Hedge

Some have argued that Bitcoin will act similarly to gold, acting as a safe haven during times of trouble. This is not simply the realm of speculation; Bitcoin has played this role before. During the bailout of Cyprus, when depositors took a haircut on their accounts and many were unable to get cash, the price of Bitcoin skyrocketed, gaining 87%. This was an amazing spike, given that Bitcoin is a worldwide currency, and the Cyprus issue was a localized problem. Should similar issues pop up in a major economy, an even larger spike is possible.

Bitcoin’s uncorrelated nature makes it one of the most interesting investments available today. On the one hand, it is mostly immune to the movements of the stock market, and in fact may offer protection in the case of a crash. Yet Bitcoin is also subject to unique risks of its own.

Unique Risks and Rewards

Bitcoin’s digital nature makes it both safer and more vulnerable than conventional assets. On the one hand, a fortune stored in Bitcoin is immune to fires and break ins, and no criminal on the street will hold you at gunpoint asking to be paid digitally.

At the same time, anyone with an internet connection can potentially hack you, engaging in an untraceable theft. Even large exchanges are not immune. Mt. Gox, once the most popular Bitcoin exchange, closed down amid allegations of fraud, leaving investors out to dry. Moreover, in a true crisis, digital assets will probably be less valuable than cash or gold in hand.

No Pain No Gain

The old adage “no pain, no gain” is appropriate here. While Bitcoin is seen by some as risky, without risk there can be no reward. Bitcoin is an exciting currency at the forefront of a true digital revolution. The fact that it is a unique, uncorrelated asset also makes it attractive as a hedge. Many investors would be well served to consider investing in Bitcoin as part of a properly diversified strategy.

Which Currencies Will Provide a Safe Haven in 2016?

2015 turned out to be a bit of a roller coaster ride for many currencies in 2015 with noticeably large movements at certain times in emerging market currencies and the euro in particular.

Sterling managed to display a sustained recovery and the US dollar also managed to largely reflect a steady economic performance in the context of a weaker global backdrop to contend with.

A global environment which remains challenging with political tensions and other significant events creating a sense of unease in financial markets helped to create periods of increased exchange rate volatility in 2015 and there seems to be little reason to not think that 2016 is going to offer much of the same.

Past events a guide to the future?

Many investors are probably familiar with the usual investment warning carried on many financial products about past performance not being a reliable guide to the future but by taking a look at some key events in 2015, it can often provide some insight as to how currency markets are likely to respond.

The European Central Bank started 2015 by announcing a massive quantitative easing program which immediately weakened the euro in response and the ECB are going to be buying €60bn per month of bonds right through to March 2017, so you already know what is in store on that front for the coming year.

The rabbit is now out of the hat when it comes to an interest rate rise from the federal reserve as they finally made the move in December 2015 but 2015 was punctuated with frequent speculation and rumours about an imminent rise. This caused the US dollar to fall to a four-year low in April 2015 so perhaps you should factor in further fluctuations as markets try to second-guess the Fed’s next move.

Other significant events that impacted currency markets in 2015 include China’s black monday in August and not forgetting that the year started with the Swiss franc soaring by 30% within a matter of minutes after the Swiss National Bank scrapped their euro cap.

These past events and the market response to them demonstrate how news and events have the capacity to stir currency markets in life or into a panic, so it is probably safe to assume that 2016 will offer its fair share of seismic events at certain times.

So which currencies will provide a safe haven for investors in 2016?

Factors that are likely to influence currency markets in the next 12 months

Further US Federal Reserve interest rate rises are probably going to be the most influential factor although changes in Chinese exchange rate policy and additional ECB stimulus announcements would also be significant factors.

Any changes in commodity prices and further global geopolitical tensions will also play their part but as a starting point for making some sort of predictions of which currencies might prove a good bet, logic dictates that higher US interest rates should help to ramp up the dollar.

What will almost certainly be different this time around with the Fed is that the rate hike cycle is going to be far more difficult to predict that in the past. This will likely mean that markets will generally struggle to correctly price in future Fed policy so this is one such example of how the past is not going to prove much of a guide to the future.

The Fed itself has a dilemma to contend with as it has to get the timing of subsequent rate hikes just right if it doesn’t want markets to under or over-react.

Identifying a safe haven currency

A safe haven currency is by definition a currency which investors want to buy into and hold during periods of economic and political uncertainty.

There are a number of key characteristics to look for in order to identify a potential safe haven currency.

If a country can demonstrate strong economic growth and stability and has its finances in order as well as a stable political system, these are key attributes that help mark it out as have safe haven currency potential.

Liquidity is also a key issue as you want to be able to buy and sell the currency with ease when you want to.

Top of the list in terms of ticking all of the above boxes is the Swiss Franc although the Swiss National Bank’s move to scrap the euro cap was a game changer especially as it had previously vigorously defended their minimum exchange rate position up to that point.

Switzerland still has a very low debt-to-GDP ratio and a very stable political system. Combined with its infamous political neutrality that has seen it avoid any sort of conflict since 1815 and the fact that it is seemingly resilient to recessions, the Swiss franc can still be considered a safe haven currency play in 2016.

The US dollar has traditionally been the default safe haven currency when the global outlook is less than positive and this was demonstrated by the fact that the dollar managed to strengthen against a basket of different currencies by as much as 30% in the space of just six months in the aftermath of the global financial crisis in 2008.

The US dollar accounts for about 40% of all daily FX transactions so liquidity is hardly an issue although an eye-watering debt pile of more than $17 trillion just take the edge of any enthusiasm that you might have built up at this point, but at least it does boast and strong and robust economy to try and service these levels of debt.

Economic power and the size of their economy are almost always going to be determining factors when it comes to identify currency safe havens and investors perceptions of how safe their money is plays a big part, which is why countries like China, Russia, Brazil and Japan struggle to qualify for safe haven status in the minds of a number of investors.

In terms of which currencies will provide a safe haven in 2016, the US dollar is a predictable but obvious inclusion on the list, especially given the influence it has on currency markets in general and the high levels of liquidity for trading.

If you are looking for something a little less obvious then the Norwegian crown might have potential, in view of the fact that it has oil, a substantial $570 billion wealth fund and no European Union membership to concern itself with. Even allowing for the collapse in oil prices it is a country which could arguably offer some potential as a safe haven currency in 2016.

Investing in currencies

One alternative investment idea to consider when looking to invest in currencies would be through a platform such as Currency Shares where you get the opportunity to invest in a currency trust, which is being promoted as a cost-effective way of gaining similar investment benefits to that of holding foreign currencies directly.

This is not a recommendation to invest in currencies this way and you should definitely seek independent advice and do your own research before committing any funds.

Another way to get involved in currencies is through one of the various exchange traded funds and again you should check out the range of options available to see if they offer a suitable alternative to trying to buy currencies directly via your own forex account.

Currencies can provide a useful tool for diversification in your portfolio away from securities and if you decide to invest in safe haven currencies in particular, the theory is that you should not experience a great deal of volatility, but there are of course no guarantees on that score.

Are Low-Risk High-Return Investments Just a Myth?

Investing at its very core is simple. It’s all about risk and return. How much of an incremental dollar are you willing to risk to gain a dollar.

Warren Buffett eloquently simplifies this even further with this advice on investing:

Rule 1: Don’t lose money

Rule 2. Don’t forget rule number 1

However, along the way we have made investing beyond complicated. Evidence of this was recently cemented in my mind with a fascinating article about a guy that lost $200 million for the bank he worked for.

The story is fascinating in itself. However, what was fascinating to me was the fact that you had a physics Ph.D that was designing financial products with obvious risks of over $100 million.

Understand that I am a finance nerd at my deepest core. I sold my hedge fund in early 2008 and haven’t looked back since. I will be the first to tell you that a Physics Ph.D could design anything he wanted and there would be absolutely no way I could understand what he or she is doing.

What is Risk Anyway?

In the first day of Finance 301 they tell you that risk is standard deviation. Meaning, how returns are distributed. You have to agree with this principle to understand anything you are about to learn in this class. Because the next thing you learn is about expected returns. An expected return is the weighted average of the likely profits in each asset class.

Here is the formula for the expected return:

risk

Note, the oversized standard deviation symbol which is the fulcrum of the formula.

The fallacy of standard deviation as a risk measurement

Not to get too picky but standard deviation is simply variance squared. Variance is the actual dispersion in returns. There are other fancy terms statisticians, physics professional and finance professors have come up with like: mean absolute deviation, target semi variance, Chebyshev’s Inequality, and well you get the idea.

Here is the problem with all of the above ratios and the Sharpe ratio which we will get to later:

None of the above statistical measures measure how much money you are losing.

That’s crazy right?

Risk is defined by how different the returns are…not losing money.

This is an absolute crazy definition of risk.

This Christmas I let my 7-year old daughter carry her $20 in Christmas money around herself (read: risk). Henceforth, it was lost. When a stock goes to $0 – this is a real risk! Note, I’ve never seen a piece of real estate go to zero – but we will get to that later.

Why the Sharpe ratio continues to fail stock and bond market investors

The Sharpe ratio is Wall Street’s favorite ratio for risk and return. Why?

Because it’s a very simple measure that measures excess return for every level of risk. Note, you will see that pesky standard deviation metric we talked about earlier.

Here is the formula for the Sharpe ratio:

Sharpe ratio = [(mean return) – (risk-free return)] / standard deviation of return

Instead of talking about how ridiculous this measure is and pointing out that this is simply a measure that Wall Street invented to sell you more mutual funds let me share with you a very personal story.

This summer I visited a country in sub-Saharan Africa and was pretty surprised to see how many banks were there, and how much they could afford on advertising. I was really surprised when I talked to locals about how the banks operate there. The banks charge to actually make a deposit (1%) and then they charge when you make a withdraw (1%). They also charge around 7-10% for real estate loans. Now for the worst part: a couple of years later, all the banks failed and confiscated everyone’s deposits.

This is RISK.

Risk = Losing Money

If Warren Buffett can simplify it, I can as well.

The problem is that we have let Wall Street define risk for us.

Importance of Cash-Flow and Alternative Investments

Stop letting Wall Street define risk for you. They don’t understand it themselves. Look at their performance during the last economic crisis. They all had to receive government support (corporate welfare). Why should they have any creditability with defining risk? As Charlie Munger puts it:

“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” 

Timber

Timber has been a favorite alternative investment of mine for over a decade now. The best part about timber is you literally don’t do anything. Every year the tree’s grow you make 2-4%, assuming constant lumber prices. The best part is that when lumber matures for harvesting you don’t have to sell. You can wait until you are satisfied with current lumber prices to sell. Typically, lumber prices are correlated with the housing market. However, they are not correlated with anything related to the stock and bond markets.

annualized returns

Further reading: http://alternativeinvestmentcoach.com/investing-in-timber/

Collectibles

I always joke with my friends that I don’t invest in collectibles but my wife sure does! My mom and stepdad were able to retire early trading gold and diamonds. This is not complicated so don’t make it out to be. All they did was go to flea markets and find people that needed cash ASAP. They would buy gold coins and diamond rings at heavily discounted prices. They would then get a booth at a gold and jewelry show once a year and sell everything at 2-5x what they paid for it.

Further reading: http://alternativeinvestmentcoach.com/invest-in-diamonds/

Real Estate

This is the alternative asset class I focus on personally. Real estate takes a lot less capital than one typically thinks. For instance, there is a hotel shortage in my town and a major event coming. As a joke, I listed my house on Airbnb.com for $550 a night and a 7-week minimum. I ended up being inundated with offers. This cost me no extra money. I have also bought investment properties with no cash out of pocket and receive very nice rent checks. Rent increases while the loan payments are locked in for several years hedging inflation.

Further reading: http://alternativeinvestmentcoach.com/investing-in-rental-properties/

Summary

Alternative investing is a lot cheaper to get into than investing in stocks, bonds and mutual funds. Additionally, the returns are generally greater and you have more control over these investments, which in my opinion provides a higher safety net because of this control. In summary, don’t let others define risk for you – especially if they are trying to sell you something. Low risk high return investments aren’t a myth – they just require education.

Further reading: http://alternativeinvestmentcoach.com/low-risk-investments/

What Do China & Russia Know About Gold & Should You Invest?

Fifty talents of gold ransomed Julius Caesar from pirates, each 71-pound Roman talent containing 1038.47 troy ounces of gold and totaling nearly $69 million in today’s currency.
Worthy of kings, gold has continued to be a significant source of investment for some countries – and individuals – even though the modern economy uses fiat currency. In a world that no longer operates on a gold standard, how precious is the precious metal?

Gold Holdings Increasing

While the United States remains the largest official holder of gold, with over 8,000 metric tons, China, Russia and a handful of others have demonstrated healthy appetites for the precious metal. In fact, China’s declared acquisitions have ranked it fifth in the world while Russia’s have placed it sixth – four places ahead of India:

– In 2000, China had a mere 395 metric tons, or tonnes, of gold, jumping to 600 in 2002, to 1,054.1 in 2009 and to 1,658.4 in 2015’s third quarter. As of December 2015, according to the World Gold Council, China had 1,708.5 tonnes, more than quadrupling its holdings in a decade, with additional reserves suspected.

– Similarly, Russia’s gold holdings averaged below 400 tonnes until 2006’s last quarter, when the federation began adding an average 28.5 tonnes per quarter; acquisitions ranged from a modest 5.5 tonnes in 2014 to an impressive 77.2 in 2015’s third quarter. World Gold Council figures for December 2015 credit the Bear with 1,370.6 tonnes – at least a 70-percent increase over a decade.

While most developed countries’ holdings remain static, some developing nations have been steadily adding since 2011:

– Kazakhstan went from 70.4 tonnes to 213.5, adding 7.8 in 2015’s third quarter.
– Jordan went from 12.8 tonnes to 41.1, adding 7.5 in 2015’s third quarter.
– The United Arab Emirates, long featuring zeros, added 5 tonnes in 2015.
– Turkey went from 116.1 tonnes to 504.5 by 2015’s third quarter.

Gold’s Economic and Political Impact

So, what is gold’s real value? Aside from the fact that spot prices are hovering around the $1,100 mark, gold carries with it a perceived promise of stability against economic volatility. For instance, despite a steadily contracting manufacturing sector and a repeatedly devalued yuan, China is the world’s largest producer of gold, supplying a full third of global demand, with expected growth of 20 percent by 2017’s end. Meanwhile, China has won International Monetary Fund special drawing rights (SDR) bona fides for its yuan, or renminbi. As of October 2016, China’s currency will join the euro, U.S. dollar, British pound and Japanese yen as approved global currency.

Similarly, Russia steadily continues to buy gold to shore up a ruble in free fall. Even now, speculation over whether Prime Minister Putin will adopt a gold standard for Russia is rampant. Meanwhile, Russia is the world’s fourth-largest producer of gold, exporting well over $3 billion of it in 2014 alone.

A gold producer itself, Kazakhstan has been acquiring gold for reasons akin to Russia’s – the need to maintain its own currency. Likewise, Turkey has become the largest gold producer in Europe, yielding up 31 tonnes of gold in 2014 and seven new mines over the last 15 years. Intent on holding its lira and economy steady, it used gold to bridge its trade deficit in 2015’s second quarter but was already purchasing more by its third quarter.

Just as many sovereign nation states equate gold to economic stability, so, too, do many private investors. The undiluted commodity offers a safe hedge against inflation. If gold demand increases, major exporters win not only higher prices but a strengthened currency, international status and influence. If inflation devalues currency, investors have the security of gold. However, gold can also become a double-edged blade, falsely valuing or devaluing a currency used to pay for it for both countries and individuals.

Personal Investment

Typically, gold prices correlate to economic state. As economies thrive, the need for gold diminishes, reducing its cost. As economies suffer, however, gold becomes a beacon of preservation of assets, with escalating demand increasing value.

Currently, prices are a far cry from both the spikes of 2011’s third quarter, when gold hit $1,921, and the modest $300 bargains of the early 2000s. With a gold spot price around $1,100 and a strong dollar, the precious metal offers investments in a number of ways:

– Physical Gold. Investors can choose from among gold bars; bullion coins, such as American Buffaloes or Eagles, Krugerrands, Vienna Philharmonics or Canadian Maple Leafs; or jewelry or other gold items.

We recommend BullionVault because they allow investors to purchase gold online at low prices. Bars can then be stored in professional-market vaults in Zurich, London, New York, Toronto or Singapore. Because of their size (BullionVault manage over $2bn worth of gold for 55,000 clients worldwide), you benefit from low storage costs which always include insurance.

– Exchange-Traded Products. You can choose from exchange-traded funds (ETFs), closed-end funds (CEFs) and exchange-traded notes (ETNs). All of these correlate to the price of gold and are traded on the major stock exchanges. With these, investors don’t actually own any gold at all and are paid in equivalent-value currency. With ETFs, the issuer – GLD, IAU, AGOL, SGOL or OUNZ, for example – may actually hold the specific physical asset you’re investing in. CEFs are similar but have higher fees and less transparency due to more active management. An ETN is an unsecured debt note issued by the underwriter.

– Mining Investment Funds. Rather than investing in the gold itself, you can invest in mining companies. Environmental rules are changing the mining industry, however, making extraction and refinement in some countries exorbitantly expensive or risky. Nevertheless, you can invest in numerous aspects of the gold industry, including exploration.

– Gold Futures. For individuals interested in high-risk-high-return speculation, futures contracts specify a price for a delivery of gold on a set date. Long and short positions – buying and selling – can offer leverage on the exchange with less investment capital needed than purchasing physical gold outright. However, trading futures relies on perfect timing, and fees can exceed returns.

The commodity of gold is riven with sentiment and financial insecurity. Experienced professionals recommend diversifying portfolios with gold or precious metals but limiting allocations to 5-10 percent.

Rewards can be amazing – like 2010’s 27-percent increase – or heartbreaking – like 2013’s 28-percent price drop followed by 2 years of sinking values. So far, 2016 shows a respectable increase in gold prices, but when interest rates rise, gold values tend to drop. In contrast, political or economic instability raises gold’s price. Charts detailing gold peaks and lows for investment choices confirm only that nothing remains the same.

Whether you’re a gold bug, a high-risk trader or a careful investor, only you can determine how much influence gold-acquiring nations will have on your investment strategies, and only time will reveal the results.

How to Invest in Scotch Whisky

Wine connoisseurs are already well catered for when it comes to being able to invest in their favorite vintage and there are plenty of us who take our whisky tasting duties just as seriously.

An alternative investment market concentrating on scotch whisky is now starting to mature and if whisky investors can come close to matching the returns that have been achieved on wine investments over the last few decades, then there will be some of us experiencing a warm glow of satisfaction that is not just down to the “wee dram” you are tasting.

Readymade market

A specialist consultancy called Rare Whisky 101 who claim to be the home of rare whisky, have compiled a Rare Whisky Icon 100 Index that has tracked the value of a collection of the most sought-after bottles of single malt scotch whisky since 2008, and that index has demonstrated a steady rise throughout the entire period.

Taking a starting value of 100, the index has risen by 208% in the seven-year period that they have been tracking prices, although you need to be aware that these are estimated values as well as actual auction values and are meant to represent the value of a basket of collectable bottles, although it does give you a representative picture of how scotch whisky is performing as a collectable investment.

The figures do also provide plenty of encouragement that there is a readymade market of whisky enthusiasts who are almost always prepared to pay a fair price to acquire the particular scotch that they are interested in.

On the list of luxury items

Just as fine wines and art are established luxury items that are traded regularly at auction, scotch whisky is definitely emerging as a more than viable candidate for joining the list of sought-after luxury items.

The auction house Bonhams has a head of whisky called Martin Green to provide valuations and oversee sales at their regular auctions and he was recently quoted as saying that “interest in whisky has been growing steadily for many years”.

There has always been a hardcore of whisky enthusiasts and investors who are entranced by the history as well as the taste of scotch and the growth in the number of potential investors has been further fueled by the fact that there are more wealthy investors from the Far East than ever before, who now have the money to match their enthusiasm for the gold in the glass that is whisky.

Getting involved

If you take Bonhams as an example, they now have four dedicated whisky auction dates in their calendar and this has changed from when the bottles used to be combined with wine and other spirits.

Whisky is now considered prominent and important enough as an investment to not share the stage with any other types of liquid-based buying opportunity and the fact that about 90% of the items to be auctioned are successfully sold, confirms the level of interest there is.

There are physical auctions that you can attend to buy some whisky or you could bid at an online auction if you prefer. The fundamental difference between the two is that you might pay up to 25% of the value of the whisky in charges if you buy at a physical auction, whereas it might be as low as 10% at an online auction.

Experts are almost unanimous in stating that the key to buying whisky at an auction and in general, is to try and identify limited edition bottles of whisky that are expected to rise in price once they are sold out.

Investing in whisky is no different to the investment strategy you could apply to other luxury items. Reputation, exclusivity, rarity and scarcity are keywords that you need to keep in mind when considering an investment in something like whisky.

If you find a bottle that ticks all of those boxes, there is a fair chance it seems that the value will rise, although there are certainly no guarantees of that.

Buy into a fund

If you are a novice and unsure which whiskies represent a worthwhile investment, you might want to consider buying into a fund.

There are funds available to invest in such as the Platinum Whisky Investment Fund which is based in Hong Kong and others like it, but you should carry out your own research and be aware that most of these funds are unlikely to be regulated.

Another option to consider is Whisky Invest Direct, which promises to open up the previously inaccessible world of scotch whisky maturation to private investors. They have created in effect a private exchange that allows you to buy quality whiskies produced by the top distillers, and at wholesale prices – typically much less than half the cost of traditional cask ownership. Economies of scale mean your whisky will be stored at exceptionally low cost, in the original distiller’s bonded warehouse. Its safe storage there is evidenced every month by an independent audit.

Distillers and blenders have been the primary beneficiaries up to this point when it comes to profiting from the increase in value that can be achieved when a whisky reaches maturity.

The fund offers you the chance to for private investors to invest at previously unavailable wholesale prices, allowing you the chance to share in the benefit of seeing your whisky mature and fetch a higher price when it is ready to be sold.

The working capital required to lay down a significant amount of whisky for ten years or more is not normally with the reach of individual investors, but this fund aims to try and open up that opportunity thanks to the collective buying power of a number of individual investors all contributing to the fund.

Wealth warning

Whilst some of the most sought-after whiskies have soared in value, there are also plenty of bottles that have suffered steep declines in their value.

Overall, the average fall of the worst performing bottles was in the region of 9% when you look at an index of 1,000 different whiskies but there are of course some individual items that have performed far worse than that, so you should always be aware that not all of your investments will prove profitable, unless you get good advice or have a talent for spotting the winners.

Charges for investing in whisky can sometimes be quite prohibitive and when you factor in storage costs on top, your whisky investment will need to perform well in order to achieve a positive return.

Another fundamental point to consider is that whisky is not an investment that generates any income or earnings so you have to rely on price fluctuations to generate a return on your cash.

As an alternative investment whisky has an obvious appeal but shifting tastes and the prospect of some brands going out of favor means that you should always consider committing only a small part of your cash to this opportunity.

Although the upside if things don’t go to plan is at least you have a stiff drink to hand if you decide to liquidate your asset.

Gold or Diamonds: Which is the better investment for 2016?

Gold prices enjoyed a revival at the beginning of 2016 as investors sought refuge from the financial turbulence that beset stock markets in the first few days of trading, and diamond prices also suffered a slump in 2015, so when comparing gold and diamonds, which one could be considered a better investment for 2016?

To try and evaluate whether your focus of investment attention should be more towards gold or diamonds, it is important to take a look at what clues the markets have been providing and what the outlook is for the year ahead.

Rough diamond market

Analysts will tend to agree that 2015 was a challenging one for the diamond market.

What we saw in 2015 was a large diamond price slump, which had the knock-on effect of forcing major diamond miners to adjust a react quickly to the turmoil.

The Zimnisky Global Rough Diamond Price Index showed that diamond prices managed to fall by 13.53% in 2015. The index was created in order to try and provide a reliable and easy-to-access rough diamond price guide, which is updated on a weekly basis, primarily utilizing price data from reported rough diamond transactions.

It has become an index that is extensively used by the diamond industry and is calculated from a starting value of 100 as of April 2004. Since the inception of the index, the value of rough diamonds managed to climb 35.2% in a ten-year period to 144.47 on the index.

Despite the 13% drop in values based on the index price in 2015, the rough diamond index was at 144.47 by mid-March 2016, so it is clear that a recovery of sorts has already taken place in 2016, bringing the index value back to where it was in 2014.

Bankers to blame

There are some who blame the bankers for a number of current financial hangovers that we have still not completely recovered from, and it seems that some prominent voices in the diamond industry are pointing the finger of blame in this direction too, as the reason why prices suffered a slump.

Martin Rapaport, who is the chairman of the Rapaport Group, published an article in November 2015, blaming diamond miners and banks for the downward trend in the diamond price.

What Rapaport is saying is that banks began to large substantial sums of money to diamond cutters after the global financial crisis in 2008. This strategy helped the cutters to stay in business and ride out the financial storm, but the major problem with this strategy according to Rapaport, is that the money helped to support rough diamond prices that were noticeably higher than polished diamond prices.

The effect of this move, created a scenario where cutters were borrowing money to buy the rough diamonds,but after they had polished them and tried to sell them on, they were subsequently unable to sell them for a profit.

Bankers it is alleged, have to bear some responsibility for their actions in the diamond industry, which resulted in a global supply glut of low to mid-quality polished diamonds. This explains a plausible reason why rough diamond prices have suffered on the Ziminsky Index, so what does it mean for prices in 2016?

Hidden amongst the gloom about price falls, is some good news, which is that 2015 witnessed the discovery of some significant diamonds.

Lucara Diamonds stole the limelight in this respect, with the discovery of a 1,111 carat diamond, although Petra Diamonds and Rio Tinto also reported valuable finds.

Combine this positive news with the fact that the rough diamond price drop didn’t influence fancy colored diamond prices, which managed to climb by between 5% and 6% on average, and the outlook seems reasonably positive for 2016.

Two significant factors that are increasing prices are rarity and a high level of demand from affluent customers. Although there are still voices of dissent, such as Rapaport, who remains unconvinced that the conditions are still challenging to allow prices to rise by any worthwhile margin, there are perhaps a number of reasons why diamond prices might move higher in 2016.

What miners have effectively been doing in recent times, is to react to lower rough diamond prices by reducing supply to the market, which is helping to boost prices in order to meet demand.

There is some consolidation within the industry still required and although there are some reasons to be cautiously optimistic about the diamond market, there are still some bumps in the road that could derail the progress.

Gold prices in 2016

A comprehensive survey published by GFMS Thompson Reuters titled Gold Survey 2015, provides some revealing insights into what events and scenarios could influence the price of gold in 2016.

The reports highlights that demand for worldwide gold coins and bars was 26% higher in the third quarter of 2015, when compared to the same period of 2014.  Another upward trend that also shows an improvement in the third quarter of 2015 in comparison to the same period of 2014, is that central banks purchased a total of 132 tonnes of gold, a 13% higher number than the same period 12 months earlier.

It will also not surprise investors who understand the driving forces behind gold markets, that India and China were reported to be solid buyers in the first nine months of 2015, with India acquiring 642 tonnes and China 579 tonnes of the precious metal.

If you take a look at the import figures for India that were published in August 2015, gold bullion imports into the country rose by a healthy 140%. $4.95 billion of gold found its way into India in that month, which is a number that is virtually double of July’s total of 89 tons of gold

Supply and demand

These figures are significant, as they seems to demonstrate a general increase in the number of buyers acquiring gold elsewhere too.

You may be surprised to hear that Russia, a number of former Soviet states and Mexico, are named as countries that have been significantly active in buying gold at a record pace, according to a Bloomberg report published in September 2015.

When you combine what could be classified as a spending spree on gold in recent times, with the news that the number of new gold discoveries has fallen quite dramatically, you begin to get a sense that the economics of supply and demand are going to play their in helping to push the gold price higher at some point, when the squeeze is felt more acutely.

Not only is demand for gold rising, which could push prices higher in 2016, but with supply numbers contracting, it could turn out to be a positive year for gold investors.

Both diamond and gold markets are currently being influenced by supply and demand factors, but if forced to decide which one to invest in, it would seem that maybe gold has the greater scope for 2016.