Certain assets like the broad stock market index are easy to invest in. These assets have natural bullish biases and go up over time. However, other assets and sub-sectors are not great long term investments. These assets should generally be avoided and left to hedge fund managers, professionals, and traders.
If you’re going to go stock picking, it is generally a better idea to pick dividend stocks than growth stocks. This is especially true for novice investors or mom and pop investors who don’t have a lot of time to follow the markets..
Since 1900, dividend stocks as a group have outperformed non-dividend stocks by an average of 1.4% per annum. This may not sound large, but over the past 100 years this meant that dividend stocks outperformed non-dividend stocks by 3x!
Dividend stocks are relatively easy to pick. They tend to be large, stable companies that aren’t at risk of being wiped out by competitors. On the other hand, it’s hard to pick a successful growth stock. Many growth stocks today will lose steam in the next few years and die off. For every one Facebook, there are 5 Myspaces, Twitters, Friendsters, etc. It’s hard to predict which growth stocks will succeed in the long run and which will fail.
With oil and commodity (sugar, cotton, corn, copper) prices still low, a lot of investors have been thinking about investing in oil and other commodities via ETF’s. This is not a good idea.
For starters, commodity ETF’s as financial products do not match the underlying price of those commodities very well. For example, even if oil prices remain in a flat range over the next few years, an oil ETF might lose 30% of its value.
But more importantly, it’s almost impossible to predict the long term direction of commodities. While there are many successful investors and hedge fund managers in stocks and real estate, there are few successful commodity investors.
Commodity prices are governed by the laws of supply and demand, but the public information on this is not released in a timely manner. Instead, the commodities markets are dominated by 10 commodity trading firms, each worth more than a hundred billion dollars. These firms produce commodities and also trade them. In other words, they can whip and drive commodity prices any way they want in the medium term because they have the relevant supply and demand information before anyone else does.
Real estate in major cities around the world
Real estate prices in major cities around the world have soared since 2011. This is largely due to the mass exodus of Chinese millionaires and billionaires who are parking their money in cities like New York, Sydney, Singapore, London, Los Angeles, etc. Their buying has pushed prices in many areas to astronomical levels. For example, a 1 bedroom apartment in Sydney costs $500,000!
This is a bubble indeed, and the music will stop when wealthy Chinese run out of money. The Chinese government has started to severely restrict the flow of money out of China. Hence, these millionaires and billionaires have trouble using their Chinese cash to buy foreign real estate. As a result, real estate price gains in these big cities will slow down because the biggest source of buyers is driving up.
Instead, it’s probably a better idea to invest in real estate in smaller cities. As the economic expansion in developed nations like the U.S. continues, a lot of smaller investors will buy cheaper real estate, thereby pushing prices higher.
Penny stocks are literally the worst investments of all time. Buying a penny stock is akin to gambling. Most penny stocks don’t have any revenues or earnings – all they have is a semi-functioning product. As a result, a few penny stocks will become medium – large sized companies one day. But the vast majority of these penny stocks will go to zero.
In addition, penny stocks experience wild volatility, so investors who are looking for more stable returns should definitely avoid this asset class.
Bonds aren’t always terrible long term investments, but they are right now. Bonds around the world (U.S., Europe, Japan) face 3 problems.
- There are staggering amounts of debt in the world. After the GFC, the world has merely piled on more and more debt instead of cutting down the debt load. Perhaps many borrowers will default on these bonds during the next recession.
- World interest rates are at historic lows. For example, U.S. interest rates have not been this low in over 200 years! So purely from a mean reversion perspective, interest rates will be rising soon. This means that investors holding a 3% bond will suffer significant losses when rates rise to a mere 6% in the next few years.
- In fact, interest rates on the rise already. The Federal Reserve is committed to 2-3 interest rate hikes a year, and the European Central Bank will possibly start to raise rates in June 2017.