If you just won the Mega Millions Jackpot of some $636 million, you're going to need a place to invest it. Given the gains in stocks this year, with the SPDR S&P 500 (SPY) up 27.6%, you might have the inkling to select stocks or an index fund for investment. Based on the historical performance of stocks over the long term, that probably makes sense, but I think there's good reason to avoid investing in the stock market now, at least for the near term. The bond market continues to face special risk due to the direction (higher) interest rates are more likely to head moving forward. Gold won't work for you either now, given the work the Fed will do for the dollar moving forward and the general improvement in economic conditions. Instead of these three fan favorite sectors, I would suggest a good portion of your lottery winnings be invested in real estate, including both residential and commercial property.
Stocks, bonds, a yacht, a Lamborghini or a trip around the world... ah! the options for your windfall are limitless if you have just won the humongous Mega Millions jackpot. But of all the options available for parking some dough for safe keeping and for income and growth too, I favor real estate.
I'm a stock picker at heart, so I would buy individual stocks of course, but I would not buy the market here at the start of Fed tapering and eventually the end of easy money. Stocks will demand continued solid economic progress moving forward and interest rates are likely to increase, which means a higher cost of capital for companies. In other words, the once low-bar for economic value creation will be raised a bit. Stocks are bound to backtrack, especially given their gains this year, unless economic developments astound. Stocks have come a long way and put up awesome year-to-date performances, so profit taking won't take much of a catalyst here.
SPDR S&P 500
SPDR Dow Jones (DIA)
PowerShares QQQ (QQQ)
Not Bonds Either
When interest rates rise, bond prices are pressured. Now the Fed is doing its best to not significantly impact bond or stock values by taking it slow and making sure everybody knows it will be data driven. Still, bonds are not my cup of tea, and given the danger of itchy trigger fingers among other investors in the securities because of the dangerous rate environment, I'll steer clear here as well.
Gold has No Luster Now
Gold I like, and its relatives are not too bad either for a short to intermediate term taste. I'm speaking of the SPDR Gold Shares (GLD), iShares Silver Trust (SLV) and the Market Vectors Gold Miners (GDX). However, I would still not buy gold now, assuming Comet ISON fragments aren't on the way to disrupt Christmas; in that case, I would buy a lot of gold. We have to assume normalcy here I suppose, and in an environment where the Fed is cutting back on its easy money policies, however slowly, precious metals remain out of favor. That's why we've seen the decline that we have in these securities and the spot metals over recent months.
Why Real Estate
So what do you buy then? I say real estate. Sure rising interest rates threaten capital appreciation and price gains, but they also could limit the ability of others and ourselves to buy real estate in the future. I think it's of utmost importance to have your own shelter now that it is still relatively affordable and while financing costs are still favorable from the big mortgage lenders like BofA (BAC). Though, given the Fed's featherweight foot braking, mortgage rates might not spike as high as investors once feared.
The Fed does not want to disturb the recovery of the housing market, and so will monitor the situation as it tapers back asset purchases, including those of mortgage-backed securities. It's also mindful of the economy, obviously, and so should not impede commercial real estate opportunities nor demand for residential rentals. And even if it does, I would much rather hold hard assets with the ability to reduce rent if necessary to keep them filled and earn income than hold paper money that I'm not sure will always have value.
Does this mean that real estate relative securities are worth buying along with physical assets? Well, real estate relative securities have already come a long way since the bottom of the real estate collapse, but many of the stocks in the group have underperformed this year.
|Real Estate Relative Securities||Year-to-Date|
|SPDR S&P Homebuilders (XHB)||+20.8%|
|Market Vectors Mortgage REIT (MORT)||-7.5%%|
|Annaly Capital (NLY)||-28.1%|
|Bank of America||+34.4%|
|Toll Brothers (TOL)||+8.8%|
|Apartment Investment & Management (AIV)||-4.3%|
|Education Realty Trust (EDR)||-17.8%|
|Health Care REIT (HCN)||-13.3%|
For those who can't buy physical real estate but want to advantage from derivative investment in the sector, I would look first to the safety of REITs that have special growth factors and insulation to the economy due to the markets they serve. For instance, Education Realty Trust, which develops properties around schools, has a special opportunity. EDR offers a 5% dividend yield, and analysts project it will grow at an 11.5% long-term rate, which is strong for a REIT. Health Care REIT is another specialty name I like. It focuses on senior living and health care properties and should benefit from demographic trends, with baby boomers aging now.
Apartment Investment & Management, is a regular apartment REIT, but it actually benefits from an economy that is less amicable to home ownership. At least it does for as long as the economy does not get too bad and force families to bunch together in homesteads. That does not seem like the direction we are headed, so AIV has appeal. AIV has a modest PEG ratio, good growth and a 3.7% dividend.
I'm not a fan of homebuilders now after their stellar gains of the last several years and considering the direction of rates is changing. Also the fat existing home market competes against them, and the still tough economic and regulated lending environment holds back some buyers. However, I like Toll Brothers, which possesses pricing power, due to its service of higher wealth and income buyers, and the fact that it has not rushed forward as quickly as other builder stocks. Also, I think Toll's effort into metropolitan markets like New York City will prove wise.
Beyond the obvious, I think Annaly Capital, the mortgage REIT, will benefit as the Fed slowly exits the MBA market. The stock has been harshly penalized by a market fearful of abrupt change in monetary policy, but policy is proving supportive. Annaly will face less competition for MBA now, so pricing should improve, and its cost of borrowing should not increase as much as was expected.
The same goes for Bank of America, the nation's largest lender, which continues to benefit from Fed mastered Goldilocks rate and economic management. BAC gets a two-fold benefit, because with interest rate spreads widening, it will continue to get funds cheap but lend at higher rates.
I understand the Mega Millions jackpot will be divided by two winners, but it's still significant enough to put to serious and good use; for that, I suggest real estate over stocks, bonds and precious metals.