7 Alternatives to Speculating on Capital Growth
We are in a unique time in the history of financial markets. While investors face uncertainty in every season, capital flows over the last decade have created some particularly unusual and extreme situations:
- Property prices have never been higher.
- Long-term government bond yields are approaching zero.
- Shares are pushing through record highs.
- Currency markets are swinging wildly.
- Demand for commodities is becoming increasingly unpredictable.
- Sovereign debt is rapidly compounding.
- Central banks are suppressing interest rates to near or below zero.
- Geopolitical instabilities are intensifying around the world.
In light of all these extremes, predicting future price movements has become quite challenging. Real estate and share prices may continue to rise if interest rates remain low. Alternatively, if markets reach a tipping point, or people lose faith in central banks, prices could move in the opposite direction. This leaves many investors scratching their heads as they try to work out the best plan for their money.
I recall an ah-ha moment I had at a conference back in 2007 when Steve McKnight wrote the words, “Property Investing,” on a whiteboard. He then asked, “Which of these two words is more important to you?”
We were all there to learn how to invest in property, having been inspired by Steve’s success. As you might expect, many began exclaiming the reasons why property was their asset of choice.
Steve said the most important of the two words is “investing,” and that we should be “investors” first, and “property investors” second. Property is nothing more than a means to an end. There may be times when the best asset class to invest in to achieve your goal is real estate. There may also be times, depending on your desired outcome, skill level and risk tolerance, that other asset classes could be more fitting.
According to a recent poll on PropertyInvesting.com, less than 25 percent of our readers are bullish enough on Australian real estate prices to buy today and hold for capital growth. Others are either pursuing manufactured growth strategies, sitting on cash until property corrects, or looking for other assets to buy.
If you’re a growth investor in a similar situation and not sure what to do, here are seven alternatives to speculating on real estate and shares.
1. Cash Up
Holding cash makes sense if you strongly believe asset prices will come down. In 2009, real estate was so cheap in some parts of the United States that cashed-up investors could take their pick of 30+ percent gross rental yields. Loans were hard to come by, so cash was king.
Unless you’re the ultimate contrarian, there are reasons to believe that a massive correction in Australian home prices is a long shot. Nonetheless, even if you’re a generic growth investor who is long-term bullish but short-term bearish on home prices, holding cash could make sense for you.
Just beware that when interest rates are low and you hold cash, you will fail to achieve an after-tax return that keeps pace with inflation. A better alternative if you have debt against real estate you are already holding real estate is to park cash in an offset account. You’ll save more in interest than you could make and there will be no tax to pay. Otherwise, be prepared to lose some buying power while you wait for those bargains to arrive.
2. Use Property as a Store of Wealth
Real estate has a proven track record of keeping pace with inflation over time. If you are cautiously optimistic about home prices and believe that low interest rates will lead to a loss in buying power that makes holding cash impractical, then you could buy real estate as an inflation hedge.
This opinion assumes that real estate prices are not overvalued relative to supply and demand fundamentals today, and will therefore continue to rise at least enough to keep pace with inflation. You trust the long-term fundamentals of Australian real estate, but are unwilling or unable to increase your skills related to other strategies or asset classes.
The downside of this approach is that you must be willing to sit on a highly-inefficient asset for potentially many years while waiting for incomes to rise. You might also find, with minimal capital growth, the buying power of your previously gained equity could erode. We’ve experienced many years of capital growth that has far exceeded inflation, so it wouldn’t be unusual to have a few years where inflation exceeded capital growth.
3. Manufacture Growth Through Creative Real Estate Deals
If you expect property prices to remain relatively stable and you’re willing to invest in your education to skill up, or if you can leverage off of someone else’s skill, a manufactured growth strategy could be your answer.
Many of the investors who I currently mentor have either a renovation or subdivision strategy. The benefit of this approach is that you can get in and then back out of the market relatively quickly, and make a profit without relying on generic growth in the overall market.
Just be sure you have a solid due diligence system and do not over capitalise. It’s not unusual for inexperienced investors to pour a lot of time and money into renovations or subdivisions, but make little to no profit in the end. Also be aware, if the market moves against you before you can exit the deal, you could lose money.
4. Buy Precious Metals
If you’re open to a more unorthodox approach, and your looking for what some consider to be the ultimate hedge against inflation, you could invest in gold, silver or platinum. Precious metals have traditionally been seen as safe haven assets, ideal when the outlook for a nation’s currency is bleak.
If you’re a gold bull and you’re looking for growth through leveraged returns, you could take it to the next level and buy mining company shares. Gold has increased in value nearly 30 percent since January 2016, but most gold mining shares have at least doubled over the same time period.
The down side of holding precious metals is that they produce no income. Gold can also be volatile. Stay away unless you have a strong opinion on its long-term value.
Also be careful about rushing out to buy gold miners today. They’ve had a massive run and if you’re wrong about gold, your losses will be much more dramatic.
5. Go Long Agriculture
Here’s another option for those with a more contrarion view. Because people will always need to eat and the world population continues to grow, many investors consider farming to be recession-proof. Australia is also well positioned to service the agricultural needs of Asia.
Rather than buying farmland and having to figure out how to make it productive, you could invest in a Farmland Real Estate Investment Trust (REIT), or buy shares in companies that either directly grow crops or support the agricultural industry.
If you’re particularly keen and believe you can foresee price changes in commodities, you could purchase futures contracts or commodity-specific ETFs. Just be sure to do your homework.
6. Trade Stock Options, Commodity Futures or Currencies
If you’re open to some more advanced investing strategies, you could learn to trade options, futures or foreign exchange. The beauty of these approaches is that you can grow your money, regardless of whether the market is moving up or down. Also, the more volatile the market, the easier it can be to increase returns.
If you know what you’re doing, average annual returns of 20 percent or more are not unrealistic. That sure beats leaving cash in a term deposit account!
Just be careful. It’s not enough to have an awareness of how to trade. You must have a proven strategy and follow it consistently. You can lose a lot of money while speculating on price movements in the underlying assets. Educate yourself before you venture into this world.
7. Start a Business
Developing an additional income stream can boost your household cash flow and protect you from changes in your job or industry. The ultimate benefit is to have more cash to throw at income-producing assets.
If you have a unique skill in your current employment, you might be able harness that skill to launch a consulting business on the side. Maybe you can use an area of expertise or interest to start an online business. Perhaps you could use an online platform, like eBay or Gumtree to sell merchandise. The possibilities are endless.
Every strategy starts with an opinion. One of the most important starting points for branching out from a speculative investing approach is to gain a broader market awareness. From there, you need clearly defined goals, a well thought-out strategy and a proven system for sorting out the bad from the good.
Unfortunately, there are no easy paths. You must educate yourself.
In Steve McKnight’s Property Apprenticeship course, we help investors develop an outcome-driven approach to growing wealth through real estae. Rather than buying and holding, and then hoping for the best, we equip you to develop your own opinions on markets and areas. We can also equip you with a proven due diligence process.
I’ve helped countless investors in our mentoring program successfully transition from a speculative investing approach of relying only on generic capital growth, to a more active and creative strategy, manufacturing growth regardless of whether the market performs.
To learn more, check out this video by Steve McKnight where he shares more about why he created this course: https://www.propertyinvesting.com/store/property-apprentice.