Five Ways to Invest Wealth and Keep Value During Uncertainty
Recent economic and federal economic policy changes in the US have me thinking carefully about what financial situation I'm going to hand down to my children. Should I pass on my wealth in silver? Bitcoin? Real estate? Mutual funds? What will stand the test of time? Many of the recent changes have me worried about the next 10 to 20 years.
First, there were the COVID shutdowns that crippled the economy and destroyed many small businesses, consolidating massive amounts of power under bigger and bigger corporations. Then, the federal government made it worse by printing money. There's a new multi-trillion-dollar stimulus bill every few months with a corresponding increase in the money supply. I can't go to work or see my family, but I can have a couple thousand dollars for a year of hiding inside? Gee, thanks Uncle Sam! With the amount of inflation this printing causes, we're basically taking from our children's future to get quick cash now. Any responsible father would much rather suffer now in order to give his children a better life.
Should I trust the dollar?
With the spectre of hyperinflation and Weimar Republic-level economic collapse looming on the horizon, I can't trust the US dollar as a store of value. No matter how much I save up, I fully expect it to be close to worthless by the time my kids inherit it. It's my duty, then, to invest it in something that will still be there 20, 40, 60 years from now.
Should I trust the stock market?
Perhaps the stock market? A nice S&P 500 mutual fund? I don't trust this for two reasons. First, if/when hyperinflation happens, I expect it will trash the economy like we've never seen before. Anything in the stock market when that happens could very well vanish.
Second, the stock market appears to be no longer tied to the health of the economy. With the Fed lowering interest rates and pumping money into the market and stocks going up even as business go under and suicide rates spike, it's clear to me that the whole affair has become a shell game between Wall Street and a handful of big corporations. In other words, it's no longer the robust system that it once was. And because it's no longer tied to real economic factors, playing the stock market feels like gambling. Tech stocks make up the bulk of the economic growth over the last decade, and everyone knows they're dramatically over-valued. The bubble has to pop soon, right? No one knows when.
Should I trust commodities?
So how about commodities like silver or Bitcoin? Both are very popular right now. Commodities might store value decently, but I dislike them as an investment vehicle because they don't produce value on their own. A company actually creates wealth. When I own stock in a company, I get a share of the wealth creation, plus appreciation of the stock itself if the value of the company goes up. But with silver, I'd just be hoping the metal will be worth more later than it is now; there's no wealth creation.
Bitcoin is similar, but more risky. Its value could shoot to the moon, or plummet to zero. It bounces around all the time. I'm not an expert on crypto (at least not this kind of crypto), but it seems to me that the crypto market is immature: full of shady brokers and trading platforms, and subject to massive amounts of insider trading and scam Initial Coin Offerings (ICOs). Those are not great conditions for an outsider to invest in. Plus, it gives me pause when everyone is saying “buy” and jumping in with no contrary voices to be heard. Typically, it's better to be selling when everyone is buying and buying when everyone is selling.
Should I trust real estate?
How about real estate? Now this option I really like. Real estate is remarkably stable. It retains a lot of value even during a recession or economic collapse. The events of 2008 were an exception due to over-leveraging and subprime loans—issues that, since then, have mostly been addressed. This suggests the next bubble to pop will likely be in a different industry.
I live in a rapidly growing area with great property appreciation, which is a plus. But the rapid spike in housing prices is pricing some of my friends out of the market. Being able to provide good rental houses for my local community would be valuable.
Finally, a nice benefit of passing on real estate to my children is that I can use 1031 exchanges to move equity between investment properties while deferring capital gains taxes, and when I pass it on to my kids they get a free step-up in basis, meaning they never have to pay taxes on the increase in value (the capital gains) before they inherited it. Our tax code in the US makes this a prime way to build multigenerational wealth without paying tax, which is why all the rich folks do exactly this.
There are downsides to real estate, of course. Unless I pay cash, I'll have a mortgage to deal with. The margins can be pretty low—when you take the rental income minus the mortgage payment, property taxes, and repairs, it's often only a few hundred a month per property. For example, I could be making $200 a month off a house, but then the roof needs replacing or the furnace breaks in the middle of winter... and poof! There go the profits. Or I could have a vacancy and the mortgage payment would drain my bank account.
I've also heard horror stories about tenants destroying properties—putting holes in the walls, denting new appliances, causing water damage, smoking or having unapproved pets, being late to pay rent, etc. Whenever something breaks, I'd be legally obligated to go fix it ASAP. I could pay a property management company, but then I make even less profit and I don't hear about it when someone destroys my stuff.
On the other hand, I've also heard good stories—someone who's had the same tenant for eight years, she takes very good care of the property, and (with permission) touches up scuff marks in the walls with the right color paint. It can go either way. I suppose it depends a lot on the specific tenant and the landlord's personality whether it's an enjoyable experience or not.
One hesitation I have about jumping into real estate is that I'd be violating one of my rules of thumb by buying now when everyone else is buying, too. Inventory is low and prices are incredibly high, but I don't think they're likely to go down much—at least not soon.
The other issue with real estate is that I can't invest small amounts unless I go with a REIT. I have to buy an entire property. In general though, I think real estate is the right way to go.
Should I invest in local businesses?
Another avenue toward wealth creation is finding ways to invest in my local community's businesses.
Entrepreneurship is an important part of my life philosophy, and I'd love to help my friends and community members get new ventures off the ground. Perhaps one of my friends wants to open a new restaurant or pub, and one wants to get into earthmoving and construction. These are risky investments. They probably have low returns compared to other options. But I can't overlook the value of building up my community. After all, a strong community will be more valuable to my children than a horde of money.
Choosing investments wisely
With all the uncertainty in the modern economy, it's not easy to know where to put your money. For myself, I like the idea of investing in real estate the best; it's a physical thing that I can touch that also actively generates wealth. What are you investing in? What do you think is wise in our current conditions?