In this podcast I will answer the question: Is there anything else I should be investing in besides stocks and bond

What else besides stocks and bonds should I be investing in?  In this blog I will be discussing investing in alternative investments – gold and real estate in particular.

Alternative investments provide a non-correlated investment that help protect an investors assets and improve return in the long run.  Alternative investments include:

  • Precions metals (gold, silver, platnum, …)
  • Real estate
  • MLPs, energy and income investing
  • Other commodities (oil, gas, agricultural products, and other hard assets)
  • Advisor solutions for due diligence, asset allocation and manager selection
  • Preferred stock

In general, we do not recommend investing more than 5-10% of your portfilio in alternative investments. The majority of your portfolio should be in traditional (stock and bond) investments.

With the growth of Exchange Traded Funds (ETFs) it is easy and inexpensive for a typcial investor to have access alternative investments. I’ll focus on gold and real estate investment trusts (REIT) for this podcast.

Gold is often associated with perpetual doomsayers to do well when the economy is poor. Gold can provide a hedge against inflation and a falling dollar and it moves in separate cycles from stocks. However, commodities (such as gold) are a very volatile investment subject to supply and demand pressures that cause the price to fluctuate greatly. Gold is used sparingly in jewelry, dentistry and some limited industrial areas, so unlike most other commodities, its value is not supported by uses other than as a default currency.

There are several ways for individuals to invest in gold: mining stock, ETFs, ETNs, coins, and bullion.

Mining Stock Mining stock can be bought individually or through funds. As gold prices increase, the earnings for a mining company generally increase. However, mining companies are subject to additional variables such as exploration, size of the reserve being mined, and business variables.

Exchange Traded Funds (ETF) – ETFs offer direct exposure to gold (and other precious metals) without the need to own the coins or bullion. They are set up as a trust with shares representing ownership of physical bars of gold stored in vaults of the fund´s custodian. Each share claims ownership of a portion of an ounce of gold. The ETFs will only give you gold for your shares if you are exchanging a very large number of shares (at least 50,000 shares in one case).

They are traded like stock, with a modest transaction cost, and a small ongoing expense ratio (as with other ETFs and mutual funds) for administrative, marketing, and compliance. There are tax issues with ETFs. Any gains from those that directly own gold are taxed at the 28% rate for collectibles, the same as for coins and bullion. They may also have gains from trading gold within the fund which creates taxable income for investors even though the income is not distributed.

Exchange Traded Notes (ETN) – ETNs promise the return of a market index but are an obligation of the issuer; investors have no claims on the assets, so there is some risk that the issuer could default. As a result, tax reporting is more straightforward.

Coins or Bullion – There are several issues with taking physical possession of gold: transaction costs, storage, insurance, dealer integrity, and shipping. Expect to pay about 6% to 10% above spot market prices. Once physical gold is bought, it has to be securely stored either directly by the owner (say, in a safe deposit box or home safe) or in a gold storage facility.

A security that invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. The movement of real estate values is not 100% correlated to stocks or bonds providing some diversification.

Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties’ rents.

Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.

Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.

Returns as of 1/19/2015

Investment (ticker)3 year return annualized5 year return annualized10 year return annualizedStandard Deviation (3 yrs)
US Stocks (ITOT)181589%
Developed Foreign Stocks (IEFA)104413%
Emerging Foreign Stock (IEMG)21815%
Small US Stocks (IWM)1715813%
Bonds (AGG)3453%
Dividend Stock (DVY)181679%
US REIT (IYR)1717812%
US Real Estate (Zillow)610
Gold (GLD)-821118%
Commodities (DBC)-14-6-214%

Bill Holliday is a Certified Financial Planner with AIO Financial.

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