Now is the time to review your investments and make adjustments based on your view of the opportunities that lie ahead. Last week I discussed strategies for stocks, bonds and inflation. This week we’ll examine real estate, commodities, and gold.
Real Estate. A popular way to invest in real estate is through a real estate investment trust (REIT). These mutual fund style investment vehicles offer diversification that is hard to achieve through other strategies. There’s good reason to worry about commercial real estate over the next twelve to thirty-six months. Many commercial real estate loans use a twenty to thirty-year amortization with a five to seven-year balloon. This means that the loan must be renegotiated every five to seven years. The real estate boom peaked during 2003-2007 meaning that many loans are coming up for renewal over the next several years. With banks under pressure from federal regulators to get bad loans off their books and real estate prices depressed, it’s easy to paint a scenario that isn’t pretty for this sector. If you own REITs, determine how much exposure you have to the commercial real estate sector and consider whether now is the time to take some profits. The outlook for apartment oriented REITs is much brighter. High unemployment and greater difficulty in getting home financing all bode well for this particular sector.
Commodities. Improving economies suggests rising commodity prices. Emerging markets such as China, Brazil, Indonesia and Russia are increasingly tapping into commodity resources to fuel their accelerating growth. Commodities are a relatively complex area of investment and perhaps your best approach is to invest through an Exchange Traded Fund (ETF) or mutual fund. ETFs offer a low cost way to invest in a basket of commodities where you also retain the ability to sell quickly should you desire to do so. One such choice is Powershares Commodity Index (DBC). There are numerous mutual fund choices as well.
Gold. Gold is the one commodity that has received the most attention over the past eighteen months because of its meteoric rise. Since 2000, gold has risen an eye-popping 400%! Historically, gold has been a challenging asset class for investors. For the twenty years preceding 2000, gold provided investors virtually no return on their investment. What are the prospects for the coming year? If the global economies continue to improve and there are no major destabilizing events, gold could come under selling pressure. Much of the demand that has driven prices up has come from investor speculation versus production demand. That speculation can reverse course very quickly and many investors will find themselves still standing when music to the musical chairs game ends. When every time you turn on the TV, you see ads about gold, it’s probably time to be a seller, not a buyer. If you are determined to invest in gold, limit your position to less than 5% of your total portfolio and plan on a long-term holding period. You can hold physical gold (coins or bullion), gold stocks, mutual funds or ETFs. One popular choice is the ETF offered by SPDR (GLD).