Alternative Assets
For investors interested in the nontraditional, there are options available and those options have perks. And these days, investors are interested. Alternative investments are a growing trend in investing, in part because of shifting economic trends and market uncertainty.
According to a Connection Capital survey, 87% of private investors are planning to maintain or increase their allocations to alternative assets over the next 12 months. And they are not alone. Oppenheimer said in a July 2020 report that, “asset growth among alternative strategies has been powerful as assets have tripled to $9.5 trillion over the past decade and they’re expected to grow to $14 trillion by 2023.”
On the whole, geo-political risks have traditionally had more impact on bonds, equities, and mainstream commodities like oil rather than alternative investments like fine wines, watches, or digital currencies, according to a report published by Nasdaq. So, in a world where it feels like geopolitical uncertainty outweighs geopolitical stability, it’s no surprise that investors are more regularly looking to alternative investments for diversification and market outperformance.
Case in point: the alternative investment of cryptocurrencies. Considered a digital asset rather than a real currency, cryptocurrency is breaking records. In the first few days of 2021, for example, Bitcoin topped $39,000 which helped to push the total value of the cryptocurrency market in its entirety to more than $1 trillion.
Here’s what all investors should know about alternative investments on the heels of 2020.
What Are Alternative Investments?
Alternative investments are generally those that fall outside of the typical variety of stocks, bonds, mutual funds and ETFs (exchange-traded funds). They range from venture capital and hedge funds, to private equity funds, precious metals, collectibles, art, wine and beyond.
Private equity involves investing in private companies outside of the public stock market. This type of investing is typically reserved for accredited investors and institutional investment firms. (Accredited investors are high-income earners, with an income exceeding $200,000 individually or a joint income exceeding $300,000 for the last two years. Accredited investors have a net worth in excess of $1 million.)
Private equity investing involves increased risk, long lock-ups and the potential for higher returns. Typically, investor money is pooled with that from other investors and used to fund private equity instruments such as buyouts. Private equity investments are long-term, with investor money often held in the fund for as long as 10 years. The money becomes available again after a sale of holdings, initial public offering, or merger.
Venture capital involves supporting new companies as they work to commercialize their innovations. Venture capital involves higher risk, but greater return than more traditional investing. Like with private equity, the funds are “locked until a liquidity event,” such as an acquisition or IPO. Money is collected from limited partner investors in increments as needed and are referred to “capital calls.”
Another type of alternative investing, hedge funds, typically trade on the public markets but employ short-selling, leverage and other strategies that most investors don’t have access to. Hedge funds are also typically limited to high-net-worth individuals and entities that are designated as accredited investors or qualified purchasers.
Other alternative investments are more out-of-the-box and include farmland, art, wine, real estate, precious metals, cryptocurrency, collectibles, mineral rights, and beyond.
Why Invest in Alternatives?
Alternative investments “boost returns, generate income, provide diversification from traditional investments and achieve their goals,” according to BlackRock. These investments offer lots of opportunities and advantages, especially as part of a long-term strategy and particularly in a COVID impacted market.
Because alternative investments don’t correlate with the stock market, they can help to limit volatility. In many cases, alternative investments can even offer a higher return, especially with markets in flux. Higher returns are possible in part because alternative investments have additional tools that traditional securities don’t, such as leverage, derivatives and short selling, according to Oppenheimer.
Alternative investments offer other benefits including a greater sense of anonymity, flexibility, protection against inflation and market crash, and an opportunity for investors to use and finesse expertise about specific investments (precious metals, for example).
Alternative assets aren’t for everybody. Many are limited to high-net worth individuals. Others require some level of expertise, or at least interest and willingness to learn. (After all, if you plan to build a collection of fine wines, you should probably enjoy wine.)
Nevertheless, alternative investments can be an excellent complement to traditional investments in a diversified portfolio.
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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as of the January 28, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
Land
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For an open-minded investor, the idea of investing in land might bring to mind a range of dreams: a “sold” sign on a wide-open space near the mountains, an “under new ownership” notice for a busy apartment complex in an urban neighborhood, or a breaking ground on a commercial mixed-use space in an up-and-coming suburb. All are correct and more.
Land is a finite resource with many uses beyond real estate that range from farming to mining for natural resources and beyond. There is no doubt that investing in raw land gives investors options.
Although real estate markets ebb and flow, land tends to appreciate in value over time. This is no surprise given the dynamics of a limited supply, increasing demand, and a growing population. For example, according to the United States Department of Agriculture (USDA), “the United States farm real estate value, a measurement of the value of all land and buildings on farms, averaged $3,160 per acre for 2019, up $60 per acre (1.9 percent) from 2018.” That’s an increase of $1,610 per acre from 2005.
While buying land offers a broad range of investments from real estate to agriculture, investing in land isn’t a quick-solution or an endeavor to take lightly. Here’s what investors should know and consider.
What Are Land Investments?
Overall, there are three types of real estate investments: commercial, residential, and vacant or raw land. The uses for raw land can be further broken down into categories including row crop land, livestock-raising land, timberland, mineral production land, vegetable farmland, vineyards, orchards, and recreational land. Land can also be purchased and held until appreciation.
When it comes to land investment, things aren’t always as they seem on the surface. There are a number of different rights to be aware of, which include:
1) Air rights: An investor might own the land, but do they own the airspace above it? Not necessarily. Owning air rights gives the investor the right to use, rent, or develop the space above the land without interference by others. This often comes into play in commercial real estate when zoning requirements determine how many stories tall a developer can build.
2) Mineral rights: Mineral rights are “legal rights or ownership to the minerals below the surface of real estate, which can include coal, oil, natural gas, metals, and more.”
3) Water rights: Water rights “are the legal rights to use water from a local source such as a river, ditch, pond, or lake.” Water rights tend to be different in the East vs the West. In Eastern states, landowners who have a waterway that moves through their property may use water in a reasonable way, not unreasonably detaining or diverting it. In Western states, water rights must be established before using any source of water. In these areas, water rights are typically sold separately from land.
4) Zoning: Local governments and municipalities have established rules and regulations that determine how a property may or may not be used. Properties may be zoned as residential, commercial, industrial, agricultural, recreational, historical, or aesthetic. As a developer, it’s crucial to make sure that your plans align with the zoning requirements.
5) Ingress and Egress: If an investment property doesn’t have direct road access to the parcel of land on which it sits, formal easements may be required.
Simply put: when it comes to investing, not all land is created equal and research is required.
Why Invest in Land?
Land is a dynamic investment with lots of opportunity—it can yield high returns, passive income, and large profit margins. Investors can plan to develop raw land, buy and hold, buy and lease, buy and sell with owner financing, or flip the land as it is into something entirely new.
It’s possible to generate future income by purchasing raw land and doing minimal maintenance, (especially if you are planning to keep it vacant and let it appreciate). Investing in raw land for purposes of development, however, “requires more patience and a penchant for long-term strategies.”
Before investing, investors should calculate your cap rates, or an investment’s yields and potential risks. Regardless of how you plan to utilize land for returns— for farming, real estate, leasing, or other— investors should consider the trends in those markets both locally and nationally.
Investors should also consider taxes, especially when it comes to reselling land. If an investor owns a piece of land for less than one year before selling, tax rates can be as high as 37 percent, according to the Tax Policy Center.
Of course, for investors looking for a less direct, less expensive, and much less time intensive way to diversify into land investing, ETFs offer a range of opportunities. These include real estate ETFs or Real Estate Investment Trusts (REITS) and agricultural ETFs.
REITs typically invest in “securities that are related to mortgage financing of real estate, including not only mortgage loans but also mortgage-backed securities and similar derivative investments.” REITs may focus on their property type, such as residential, retail, healthcare, self-storage, industrial, office, hotel, data center, or timber REITs.
Moreover, REITs allow investors to get involved in real estate with smaller amounts of money than required to buy properties. If you consider that on average a home in the U.S. costs $200,000 and a commercial property can cost much more, it’s easy to understand that building a diverse real estate portfolio would be expensive. REITs, on the other hand, allow investors to buy shares of a grouping of a diverse range of properties with a share costing as low as $100.
Investing in land, particularly buying a plot of land for a specific purpose, is nothing to take lightly. While it can offer big returns, it also poses big challenges and requires extensive planning. ETFs offer another path that might be right for those interested in getting their feet wet. Either way, investing in this finite resource is likely to pay off in the long run.
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The information and data are as of the January 28, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.
Municipal Bonds
When you see the latest hospital, school, highway, or airport alongside the road, you might not immediately imagine that it was likely partially financed with municipal bonds. In fact, two out of three infrastructure projects in the U.S. are financed with municipal bonds, according to a report by New York Life Investments.
Municipal bonds have a long history; the first was established in 1812 in New York City to raise money to build a canal. These days, they are still a tool used to help fund large, high profile projects. In 2018, for example, “the Denver International Airport issued $2.5B in bonds to finance capital improvements, the largest airport revenue bond in municipal bond history.” In 2016, “the New York State Thruway Authority issued $850 million in bonds to finance a portion of the new NY Bridge Project.” So, while municipal bonds might sound boring, they are helping communities to accomplish big things.
Not only do municipal bonds (also called muni bonds) make many new infrastructure projects possible, they can generate passive, tax-free income for investors.
While municipal bonds were initially hit hard by the COVID-19 pandemic, they have since recovered with robust Federal Reserve support. According to BlackRock, because COVID-19 is likely to drive higher government spending and record deficits which is in turn likely to drive higher taxes for investors, tax-free income vehicles like municipal bonds are likely to be more attractive than ever in the years to come.
Here’s what investors should know.
What Are Municipal Bonds?
Municipal bonds are financial vehicles for communities to build schools, fix highways, improve water systems, maintain bridges and tunnels, upgrade hospitals, and more.
Municipal bonds are a means for investors to loan money that funds local infrastructure and public works programs. In short, when a municipality needs to raise money for an infrastructure project, they often issue bonds. These bonds fund a project over a designated period of time. During that scheduled period of time, investors are paid interest (typically semi-annually) until the bond matures, at which time they receive their initial principal back.
There are two types of municipal bonds, a general obligation (GO) bond and a revenue bond. A GO bond is usually backed by a municipality’s local government and carries an unconditional promise of repayment. GO bonds generally pay investors via a general fund or through a dedicated local tax. Revenue bonds fulfill debt obligations via raised money. For example, a bridge that collects a toll or a sporting facility that raises money via ticket sales.
Municipal bonds are unique from many other bonds in that they are mostly tax-exempt at the federal level, and in many cases, at the state level as well. They have enjoyed their tax-free status since 1913. According to the National Association of Counties (NACo), “the tax-exemption of municipal bond interest from federal income tax represents one of the best examples of the federal-state-local partnership.” The tax-exemption applies to earned interest. So, while corporate bonds might offer a higher earned interest rate, because corporate bonds are taxed, their take-home earnings might actually be less than their municipal counterparts.
Municipal bonds also tend to outperform other vehicles like CDs, although municipal bonds have a slightly higher associated risk. Nonetheless, municipal bonds still have a relatively low default rate (lower than the corporate bond default). Between 1970 to 2011, there were only 71 municipal defaults, compared to 1,784 corporate defaults during the same time period, according to Moody’s analysis.
One possible drawback is that municipal bonds tend to be less liquid than even their corporate counterparts, which investors should consider before investing.
Why Invest in Municipal Bonds?
Municipal bonds tend to help buffer portfolios as the stock market fluctuates. Municipal bonds are unique in that they offer both tax-exempt income and high credit quality. They have particular appeal for income-oriented investors in higher tax brackets who want to reduce federal and state income tax bills. The municipal bond tax exemption makes them attractive enough that investors often choose them over their corporate counterparts.
Regarded as a conservative investment, municipal bonds tend to fluctuate less than stocks. They typically pay a predictable amount twice per year. They also offer a low chance of default, especially considering that they are usually backed by taxes and fees generated by essential services.
Perhaps even more appealing, municipal bonds allow investors to invest their money locally. These bonds offer investors the opportunity to be a part of building their city’s newest football stadium or their community’s newest school facility, for example.
Not only that, municipal bonds help to keep infrastructure decision-making power with state and local leaders in partnership with their residents, according to NACo.
Investors should note that municipal bonds with a shorter duration often offer lower yields than longer duration bonds. Nonetheless, with either type, investors can anticipate getting their initial investment back and then some.
Municipal bonds are a tangible way for investors to support infrastructure. Not only do they offer a range of benefits for investors, they benefit the communities where projects that they help to fund are built. For those reasons, they should be on every investor’s radar.
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with a Magnifi Account
Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.
The information and data are as of the January 28, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.
FINSUM + Magnifi: The Best ETFs for Buying Into the Ecommerce Surge
(January 2021)
One year ago you could have easily said that brick and mortar retail was effectively dead, or at least had a very bleak future as ecommerce was taking market share quarter after quarter. Taking a look around today, it is hard to imagine ecommerce could have stronger demand behind it. Understanding that, it seems like it might be a great time to buy into ecommerce, as demand for online shopping seems likely to continue for the foreseeable future (including after the pandemic). Many ecommerce ETFs had a great year in 2020 and there are numerous interesting takes on the how to invest in the sector. Some ETFs to check out include the ProShares Long Online/Short Stores ETF (CLIX), Amplify’s Online Retail ETF (IBUY), and the Global X E-commerce ETF (EBIZ).
Source: CNBC
FINSUM + Magnifi: Why it is a Good Time to Buy into Cloud Computing
(January 2021)
If you dig under the handful of headlines that have driven financial media during the pandemic, you will find a sub-narrative that is just as potent and more specific. That narrative has to do with cloud computing. For anyone that has been paying attention, cloud computing has experienced massive growth during the pandemic, as the second wave of digitalization ushered in by COVID has pushed cloud computing capacity ever higher for tech companies. Much of the headlines around this center on cloud computing leader Amazon, whose web services division help powered the hyperbolic growth Zoom was able to achieve during the pandemic, for example.
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FINSUM + Magnifi: Putnam Warns Fresh Stimulus is a Major Risk to Markets
(January 2021)
Despite all fears, markets had a fairly strong year in 2020. Why? The answer is pretty clear. Other than some general optimism about how large cap tech would perform during the pandemic, the real savior was huge government stimulus which infused massive amounts of cash into the economy and kept the US out of its worst recession since WWII. Fast forward to January 2021 and we have another major stimulus package on the horizon being pushed by Biden and the Democrats. While many investors might be elated at the prospect, Putnam Investments is warning investors that this could be a death knell for the market. The reason why is that a major new stimulus package would give the market a “sugar high” and potentially cause a melt-up that inflicts serious pain soon thereafter.
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FINSUM + Magnifi: Why Gold is in for a Tough Year
(January 2021)
Gold had a very strong 2020 as investors feared chaos from the pandemic. However, 2021 looks likely to be a weak year for the metal. The reason why has to do with reflation. Everything the new Biden administration is planning to do (or not do) is part of an effort to reflate the economy. Whether that means the nearly $2 tn stimulus package that will be primarily directed to low income households, or new Treasury chief Yellen’s commitment to not intentionally weakening the US Dollar. All of this poses a major headwind to gold, as the metal yields nothing and will suffer as rates moves higher on creeping inflation.
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FINSUM + Magnifi: Goldman Publishes a Crucial Call on the S&P 500
(January 2021)
The market has been a bit choppy to start the year, including a loss over the last five days. The weakness of last week came as somewhat of surprise to investors as Biden announced that a nearly $2 tn stimulus package was in the works. That said, Goldman Sachs is undeterred in their view of the economy. In fact, it is exactly their view of the economy that drives their forecast. The bank put out a report last week that calls for a 14% gain in the S&P 500 this year. The reason why is that Goldman believes there is going to be GDP growth of 6.4% this year compared to a consensus estimate of 4.2%. Alongside this expansion, the bank thinks earnings per share will spike by 31% compared to a decline of 17% in 2020.
Source: Market Watch
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FINSUM + Magnifi: Munis Still Look Attractive
(January 2021)
Advisors don’t need to be told that rates are at ultra-low levels. Yet despite this, munis are still maintaining their attractiveness. Muni issuance was at a recent high in 2020 (the highest level since 2013) with $3.9 tn outstanding. The reason why is that many municipalities have been seeing budget shortfalls because of COVID. Despite the big jump in issuance, demand has kept pace, with investors gobbling up as much as municipalities can issue. Demand has started well this year too, with muni ETFs seeing gains.
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Blending a Finance Background with the Latest Tech Stack: A Conversation with Magnifi CPO Tom Van Horn
Blending a Finance Background with the Latest Tech Stack: A Conversation with Magnifi CPO Tom Van Horn
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