Asset Classes - Real Estate & Other

June 26, 2018

Today is the final installment of a four-part series on the different types of asset classes, and today is all about the “other” types of assets.

asset classes

So, this category is quite broad. This would include any kind of property, or “thing,” like jewelry, a car, or a boat. Sometimes people also include commodities (a raw material, such as water, gold, oil, copper, etc.) as a separate category, but I think we can include them here under tangible assets. Some people like these types of assets because they CAN actually see and touch them. They aren’t phantoms like stocks on a paper statement. However, they still can lose money.

Real Estate

HFor the longest time, real estate (mostly meaning, commercial real estate, or assets found in REITs) was the highest growing asset. As this chart from JPMorgan shows, REITs (Real Estate Investment Trusts) were the highest performing asset for 20 years, ending in 2017.

Real Estate

Side note: Jill-splain this to me: Real Estate Investment Trusts

Basically, a REIT is a type of investment that owns assets related to real estate. Instead of buying individual real estate asset, you could just buy a REIT, which is kind of a like a stock/ETF/Mutual fund, in that many of them are traded on the major stock exchanges, so they are far more liquid than owning real estate yourself. This is also a cheaper way to invest in the real estate asset class, as REITS tend to own commercial real estate like malls and office parks, and you would need significant capital to purchase one of these yourself.

Real estate as an investment is significantly different than real estate as a place you live, however. A home purchase can be an investment but should not be considered a way for you to make a lot of money in the short-term. I should know; I own a house in Flint.

Ways to Invest in Real Estate

Items to Consider

1. Buy a REIT (see above) OR a real estate ETF/Mutual Fund.

The easiest and probably cheapest way to invest in real estate. Consider the fees. Usually these things invest in commercial real estate types which have higher potential for income and/or growth, other than malls, which have been declining in recent years.

2. Buy properties and rent them out (that provide a POSITIVE cash flow, see below).

 

Pros: potential rental income. If you buy these properties below market value, and have plenty of cash flow, you may be able to turn a profit. Also, consider commercial properties vs. residential rentals. Cons: It is very important to consider the expenses, taxes and have the right tenants to make this work. Sometimes it is best to leave this up to a property manager. Do you really want to be a landlord?

3. Buy properties and flip them.

 

So, the rise of all those shows on TLC and HGTV have led people to believe that they too can make millions by buying properties at low cost, fix them up a little bit, and sell them for big profit. It’s a lot harder than it looks.

Precious Metals

Precious Metals

Ways to Invest in Precious Metals

Items to Consider

1. Buy a gold or precious metals ETF/mutual fund.

Easy, consider fees

2. Buy ACTUAL gold and silver coins/bars/bullion.

 

Pros: You may feel like a pirate. Can you hold your stocks in your hand and cuddle them at night? Do they jingle when you clank them together? No, they do not. Coins FTW.

Cons: However, buying physical metal requires going through a dealer/distributor, which can sometimes be:

  a. Expensive       b. Shady

3. Buy gold jewelry.

My mom would probably say this is the best way.

4. Buy gold futures contracts (keep reading for more about futures).

Complicated and comes with its own set of risks.

5. Buy gold mining company stocks.

One mine collapse and you’ll be in trouble.

 

More items to consider on metals overall:

Pros

Cons

Metal prices do fluctuate and can decrease, but also are generally independent of the stock market so they may provide additional diversification.

Physical metals are not very liquid. You may find difficulty trying to sell it and still maintain a profit.

There has been increased demand for gold in recent years.

Metal dealers peddle uncertainty. They prey on your fear and may charge high fees. Also, with dealers, you might not get to take delivery (because they make you hold it in their secure facility), so there is risk that they are scamming you and you don’t actually hold anything.

Metals may provide a hedge against inflation or a falling U.S. dollar.

Metals can be volatile in the short-term.

 

 

No dividends or interest paid on physical metals.

 

If you do hold physical metals, you may have additional costs—safe deposit box, insurance, etc.

 

Commodities

Commodities

Honestly, at this point, I should have probably just ended this blog and started a different one, but this super long blog is what you get when you say part 4 out of 4.

Metals can also be considered commodities, but what if you are just dying to invest in livestock and don’t want to purchase your own cow? Well, you are in luck because another type of asset, called a commodity, can facilitate this for you.

Brief history: a long time ago, people traded stuff for a living. Spices, shells, meat, etc. This essentially was commodity trading in its earliest form. Now, we use computers to do our trading which includes buying and selling futures contracts. Ugh, there’s that F word again. I better explain it; third time’s a charm.

Futures are essentially gambling on the price of goods. However, it can make sense for companies like oil producers or farmers who want to hedge against future drops or rises in price, and for investors looking for further diversification.

Side note: Jill-splain this to me: Futures Contracts

A futures contact is a legal agreement to buy or sell a specific thing at a specific price at a specific time in the future. Sometimes you have “take delivery” of the thing, or you have to settle it in cash. When someone says “futures” or “futures contract” -they are referring to the same thing. When you buy, you take delivery; when you sell, you distribute.

There are many different types of commodities:

  • Metals (gold, silver, platinum, copper, palladium, nickel, aluminum, cobalt, zinc)
  • Livestock and Meat (literally live cattle, lean hogs, etc.)
  • Energy (crude oil, natural gas, gasoline, propane)
  • Agricultural (corn, soybeans, wheat, rice, cocoa, coffee, cotton, sugar)
  • Cryptocurrency (Bitcoin, etc.)
  • Random Other things (rubber, wool, amber)

Ways to Invest in Commodities

Items to Consider

1. Buy a commodities ETF/Mutual fund

(You knew that was coming, didn’t you? They seriously do have a mutual fund for just about anything you want to invest in.)

 

2. Purchase oil & gas exploration company, timber company, or again, gold mining company stocks. Buy farm company stocks to get those cows.

 

Cows!

3. Buy and sell commodities futures contracts. You can purchase futures contracts on the mercantile exchanges at one price, using a fraction of the value of the whole contract.

These are really complicated. Delivery doesn’t usually take place. You don’t really want to buy 1,000 barrels of oil, so typically the investor sells the contract before it expires.

 

In summary, all these things are just more ways to diversify your investment portfolio. They each come with their own set of risks and rewards.

As a reminder, you can always contact me with additional questions.

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jill Carr and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification and asset allocation do not ensure a profit or protect against a loss.

Be advised that investments in real estate and in REITs have various risks, including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. Additionally, investments in REIT's will fluctuate with the value of the underlying properties, and the price at redemption may be more or less than the original price paid.

Real estate investments can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.

Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.

Futures trading is speculative, leveraged, and involves substantial risks.

Investing always involves risk, including the loss of principal, and futures trading could present additional risk based on underlying commodities investments.

Investors should consider the investment objectives, risks, charges and expenses of an exchange traded product or mutual fund carefully before investing. The prospectus contains this and other information and should be read carefully before investing. The prospectus is available from your investment professional.

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