I Put Half Of My Net Worth Into These Investments For 2020

Dec. 28, 2019 9:00 AM ETBAM, ET, MMP, O, SPG, SPY, STAG, BAM.A:CA343 Comments

Summary

  • The great majority of investors allocate most of their wealth into financial assets such as stocks, bonds and cash in 2020.
  • I prefer real asset investments such as commercial real estate, energy pipelines, airports, toll roads and other infrastructure.
  • Below I explain all the reasons why I invest 60% of my net worth in real assets and how you can do it too.
  • Looking for a portfolio of ideas like this one? Members of High Yield Landlord get exclusive access to our model portfolio. Get started today »

My investment approach is very different from most other investors. Coming from a private equity background and being raised in a family of real estate entrepreneurs, I never understood the appeal of investing the majority of my net worth into traditional financial assets.

Ruling out cash and bonds is simple for most investors. Both provide mediocre returns and no protection against inflation. You may hold a little of both, but clearly, the bulk of your assets shouldn’t be in bonds or cash unless you really have to.

Stocks are a bit of a different story. They may provide good returns over time, they are liquid, and protect against inflation – at least partially. On the flip side, there also are many downsides to investing in stocks if you are anything like me:

  1. They are generally efficiently priced.
  2. They are highly volatile.
  3. They pay very little income.
  4. They feel like speculation.
  5. I cannot understand them.

Since most stocks are efficiently priced, you are unlikely to earn alpha by cherry-picking investments. Moreover, because they bounce up and down dramatically every day and pay little income, they often feel like a speculation activity, rather than a solid long-term investment.

Then let’s be real for a second. You cannot expect exceptional results if you are a jack of all trades. Most businesses are highly complex and you cannot be an expert in tech, industrial, pharmaceutical and consumer goods companies. You may think that you understand the business model of a particular stock, but think about it: How well do you really grasp the fundamentals of a multi-billion dollar operation in a sector that you are not actively involved in. I think that it's not possible and you have no competitive advantage.

For these reasons, and a few others that we discuss below… I'm not a big fan of traditional stocks, bonds and cash. I invest in all three, but I only dedicate a smaller portion of my portfolio to them.

So Where Do I Invest My Capital Then?

The answer is real assets. Real assets include, but are not limited to commercial real estate, windmills, energy pipelines, mines, airports, solar farms, railroads, etc. You get the point: Anything that's tangible and part of our infrastructure.

source

Today, roughly 60% of my portfolio is allocated between these investments.

Why Invest So Much in Real Assets?

The short answer: I think that real asset investments are poised to generate higher total returns – with more income and less risk – than most other financial assets in the coming decade.

The longer answer is that real asset investments offer six competitive advantages over traditional stocks, bonds and cash:

  • #1 - The Only Yield Left: The 10-year Treasury yields only 1.8%. Stocks pay even less than that. And cash pays close to nothing. On the other hand, real assets pay 6%-10% income that's consistent, predictable and often contractually guaranteed for many years to come. Think of an office building that you buy at a 6% cap rate and finance half of it at a 4% interest rate. These are very realistic assumptions and you get an 8% income yield.
  • #2 - Greater total returns: Real assets generate higher income, but they also appreciate in value and grow cash flow. A well-located office tower may yield 6% and grow in value by 3% per year. Add to that a bit of leverage and you can reasonably expect double-digit total returns even in 2020.
  • #3 - Inflation protection: When you invest in low-yielding bonds and cash, you are at big risk. Some stocks may provide good inflation protection, but it greatly depends on the business model. Real assets, on the other hand, are well protected as their income and values tend to grow along with inflation.
  • #4 - Valuable diversification: Financial assets are highly volatile and adding real assets to a portfolio has proven to lower volatility. As such, investors can profit from diversification benefits even as they boost returns and income of your portfolio.
  • #5 - Real and Tangible: This is a more psychological argument, but you can see, touch and smell real assets. When you drive down the street, and you see the office building, you know that it's real and tangible. It has tenants paying rent. It has value. And it's simple to understand – unlike most other businesses.
  • #6 - Recession-Resilience: Real assets provide essential infrastructure to our society that we cannot live without. We need roads, we need energy, we need hospitals. Their owners generate stable income that is defensive to cyclical turns.

But do not take this from just a Seeking Alpha author. I am not alone to think that real assets are set to outperform. Large institutions which were early to implement real asset heavy portfolios have enjoyed strong results. Over the past 30 years, the Yale Endowment Fund returned 13% per year. Similarly, Brookfield (BAM) earned a 16% annual return over the same time frame – compared to just 7% for the S&P 500 (SPY).

track record real asset

source

Now, other institutional investors are taking note of their success and starting to reallocate capital toward real asset strategies in masses. In 10 years, institutional capital in this space has grown by $30 trillion, and another ~$50 trillion is expected in the decade ahead.

real asset rush

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With interest rates expected to remain awfully low for many more years, and stocks trading at historically high valuations, it's no surprise that so many are chasing real assets. They are the only assets that can still provide double-digit returns with reasonable assumptions in the coming decade.

How Do I Personally Invest in Real Assets?

OK, so real assets should be a vital part of your portfolio. How is the average do-it-yourself retirement investor supposed to put this into practice to profit from the rush to real assets?

Fortunately, you do not need to be a multi billion-dollar institution to invest in real assets. At High Yield Landlord, we specialize in liquid alternatives to gain exposure to high yielding real assets. This includes REITs, MLPs, utilities and other listed infrastructure companies such as airports, mines, and toll roads.

We believe that they provide the best risk-adjusted returns because they combine the positives of financials assets:

  • Low transaction cost
  • Easy liquidity
  • Professional management

With all the positives of real assets:

  • Higher income
  • Greater total returns
  • Inflation protection

Moreover, it's not uncommon for these investments – despite all of their advantages – to trade at discounts to the value of their underlying holdings. This provides savvy investors with the opportunity to achieve profits that exceed the already superior total return outlook for real assets.

Our Two Favorite Listed Real Asset Investments:

Though we cover many different forms of real asset-backed financial assets, two of the most popular investment sectors include:

(1) Commercial real estate via real estate investment trusts, commonly referred to as REITs. Just like mutual funds, they allow investors of all kinds to invest in real estate without actually having to go out and buy, manage and finance properties themselves. They are designed for investors looking for superior income, along with reasonably good price appreciation prospects over time. Those looking for these benefits while also guarding against the downside will want to focus on apartment communities, industrial buildings, grocery-anchored shopping centers, and net lease properties. While some time ago, these highly profitable investments may have been reserved to high net worth individuals and institutions, it's today easier than ever before to invest in real estate through readily liquid, high-yielding REITs. Of the more than 200 REITs trading on public exchanges today, a few popular examples include Realty Income (O), Simon Property Group (SPG) and STAG Industrial (STAG).

(2) Energy Pipelines, just like commercial real estate, generate a lot of cash and are an essential component of our infrastructure. Pipelines generally offer even greater income than traditional real estate properties but have lower appreciation potential in the long run.

Master Limited Partnerships (or MLPs in short) are publicly-traded partnerships that own energy infrastructure. Just like with REITs, investors can get exposure to high yielding energy pipelines through the purchase of MLPs. Popular examples include Energy Transfer (ET) and Magellan Midstream Partners (MMP).

The Real Asset Portfolio: Putting It All Together

REITs and MLPs – along with several other real asset backed financial asset investments – are all high-yielding assets that allow us to generate more than $5,000 in annual passive income from a small $70,000 Real Asset Portfolio.

Source: High Yield Landlord Real Money Portfolio

Compared to traditional stocks, our real asset portfolio also enjoys much more reasonable valuation metrics trading at:

  • 9.5x cash flow on average.
  • 18% discount to estimated NAV.
  • We generate a high 7.2% dividend yield…
  • ... with a low 68% payout ratio.

We believe that these attractive attributes will continue to attract more capital toward real assets. This will result in the bidding up of prices, compressing yields, higher valuations, and strong total returns to investors who position themselves early enough.

Still, 20 years ago, most investors would ignore these assets. Today, they are becoming one of the biggest components of institutions’ portfolios:

real asset allocations

source

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This article was written by

Jussi Askola profile picture
55.15K Followers
Become a “Passive Landlord” with our 8% Yielding Real Estate Portfolio.

Jussi Askola is a former private equity real estate investor with experience working for a +$250 million investment firm in Dallas, Texas; and performing property acquisition in Germany. Today, he is the author of "High Yield Landlord” - the #1 ranked real estate service on Seeking Alpha. Join us for a 2-week free trial and get access to all my highest conviction investment ideas. Click here to learn more! 

Jussi is also the President of Leonberg Capital - a value-oriented investment boutique specializing in mispriced real estate securities often trading at high discounts to NAV and excessive yields. In addition to having passed all CFA exams, Jussi holds a BSc in Real Estate Finance from University Nürtingen-Geislingen (Germany) and a BSc in Property Management from University of South Wales (UK). He has authored award-winning academic papers on REIT investing, been featured on numerous financial media outlets, has over 50,000 followers on SeekingAlpha, and built relationships with many top REIT executives.


DISCLAIMER: Jussi Askola is not a Registered Investment Advisor or Financial Planner. The information in his articles and his comments on SeekingAlpha.com or elsewhere is provided for information purposes only. Do your own research or seek the advice of a qualified professional. You are responsible for your own investment decisions. High Yield Landlord is managed by Leonberg Capital.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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