Recession is looming large! Michael Burry(Big Short fame) has blewn the bugle recently. Investing in assets is an essential strategy for achieving your financial growth and stability. Let’s look in detail at how Recession Proof Investing by identifying Real vs Fake Assets in this article.
Today, we live in interesting times. Recession is lurking in the corner. As an investor, you are always on edge about where to put your money.
We wake up in the morning with one or the other shocking news. Either a bank or a country goes bust!
The point in the case is of Banks like Silicon Valley Bank(SVB), Credit Suisse, or countries under duress like Srilanka or Pakistan. Both US and Switzerland governments had to immediately intervene in matters related to Banks. With the intention to safeguard the interests of thousands of innocent citizens whose deposits were with banks.
But by then, many Small Banks were hammered in the stock market. So negative sentiment and panic definitely take over the psych of investors once bad news comes in the market.
While in the case of Srilanka and Pakistan, rising petroleum and import costs due to Ukraine War were the major reason for the collapse. There are a few other reasons like corruption, policy matters, and unstable regimes. However, this resulted in massive inflation up to 40% or more. The situation has become unsustainable while this is written, and both countries are standing with begging bowl in front of the IMF (International Monetary Funds).
The key word here is TRUST!
Trust is the foundation for the long-term sustenance of any business. Post-COVID, we are combating inflation. Therefore knowledge of recession-proof Investing becomes essential.
As an investor, decision-making becomes very difficult. Where to invest? where will be my money safe? Whether to invest long or short term?
How to identify the right Investing In Real vs Fake Assets classes?
Therefore, it is crucial to understand the difference between real and fake assets to make informed investment decisions. In this article, we will explore the pros and cons of investing in real vs fake assets.
Real Assets:
Real assets are physical assets that have intrinsic value and are tangible. The one you can touch, and feel.
As you may know, they are real estate, commodities like gold, silver, oil, artwork, agricultural land, machinery in a factory, and other collectibles. Real assets have value due to their substance and properties. These assets differ from financial assets, which include stocks, bonds, and cash, and are often intangible in nature.
In economics, real assets have the capacity to produce goods or services. Hence, you can say they have value. They can be Recession Proof Investing.
The core purpose of real assets is to generate revenue and profits. So the intrinsic value of these assets stems from their utility with regard to productivity, i.e., their capacity to produce and generate cash flows.
In short, they provide you with long-term Financial Security and regular Cash Flow.
Fake Assets:
The concept of fake assets is not as widely recognized or defined as real assets. However, fake assets appear to you to be valuable. But actually do not contribute to long-term wealth creation or financial security.
Fake assets might include investments in vehicles such as cars or boats, which can quickly lose value and require ongoing maintenance expenses, as well as investments in stocks or other assets that lack fundamental value or underlying assets.
Fake assets may also include certain types of retirement plans, such as 401(k)s for US, which may offer limited investment options, high fees, and poor returns.
In general, you can easily find fake assets. They lack underlying value or potential to generate long-term wealth.
They may offer you short-term gains, pleasure, or convenience. But ultimately may not be sustainable or reliable sources of financial security for you.
It is important for you as an investor to carefully consider the potential risks and benefits of any investment and to prioritize assets that offer real value and potential for long-term growth.
Fake assets are financial assets. At times you will find, that they are not backed by any physical commodity. They include stocks, bonds, and mutual funds.
Fake assets are often not Recession Proof Investing.
Pros and cons of Investing In Real Assets :
Pros
- Tangible Value: They offer you a sense of security and stability as an investor.
- Inflation Hedge: Real assets are known for their ability to hedge against inflation. They are often seen as a safe haven for you as an investor during periods of high inflation.
- Diversification:great way to diversify your portfolio. It can help you spread your risk and minimize your exposure to market volatility.
Cons
- Illiquid: Most real assets are less liquid than financial assets. They will be cumbersome to exchange for you. You may not sell them quickly. And you may take some time to find a buyer willing to pay a fair price.
- High Transaction Costs: Investing in real assets can cost you dearly due to high transaction costs such as brokerage fees, legal fees, and property transfer taxes.
- High Upfront Investment: You need significant upfront investment, which can be a barrier to entry.
Pros and Cons of investing in fake assets :
Pros
- Liquidity: Fake assets are highly liquid and can be easily bought and sold on exchanges, making them a popular choice among investors.
- Lower Transaction Costs: Compared to real assets, investing in fake assets can be more cost-effective due to lower transaction costs.
- Diversification: Investing in fake assets is an excellent way to diversify your portfolio and minimize your exposure to market volatility.
Cons
- Volatility: Fake assets are more volatile than real assets, which can lead to significant losses for investors.
- Inflation Risk: Fake assets do not provide a hedge against inflation, and their value can decrease over time due to inflation.
- Market Risk: Investing in fake assets is subject to market risk, which can result in significant losses during a market downturn.
examples of Investing In Real vs Fake Assets
1. Investing in Real Gold vs Gold ETFs.
As an investor, Gold investment should definitely be part of your portfolio. Look at the Chart below. Gold has almost always followed inflation in the last 50 years.
Let’s discuss what is better, investing in real Gold or Gold ETFs.
Investing in Real Gold
Investing in gold or gold ETFs (Exchange-Traded Funds) can be a way to diversify an investment portfolio, but there are some differences between the two options. Gold is a physical commodity. It is a solid hedge against inflation. And as a safe-haven asset during times of economic uncertainty or high inflation.
However, investing in physical gold requires purchasing and storing the gold, which can be expensive and inconvenient. On the other hand, investing in gold ETFs allows investors to invest in gold without physically holding the commodity.
ETFs are funds that are traded on stock exchanges and represent a basket of underlying assets. Gold ETFs hold either physical gold or futures contracts that track the price of gold.
Where to buy physical Gold from?
You would be wondering where to buy Physical Gold from. The process is very simple if you are a US citizen for the IRA purchase scheme. Please leave a comment below if you want me to make a Blog reviewing various known avenues of buying physical gold.
A couple of big and reputed firms selling physical gold include Augusta Precious Metals, Goldco, and Birch Gold Group( In USA)
Investing in Gold ETFs
Investing in gold ETFs can offer some advantages over investing in physical gold. ETFs offer liquidity, making it easier for investors to buy and sell gold quickly.
They also offer lower transaction costs than physical gold, as investors don’t have to pay for storage or transportation costs. Additionally, investing in gold ETFs allows investors to diversify their exposure to gold by investing in a basket of gold-related assets rather than a single asset.
However, investing in gold ETFs does come with some risks. The value of gold ETFs can be affected by a variety of factors such as changes in supply and demand for gold, fluctuations in currency values, and market volatility.
Now the question comes.
What are top performing Gold ETFs in US?
The iShares Gold Trust Micro ETF, the GraniteShares Gold Trust, and the Abrdn Physical Gold Shares ETF are the best-performing gold ETFs. The three funds have performed better than the broader U.S. equity market and a key gold index over the past year.
Again, If you want me to make a detailed Blog on Gold ETF, pl leave a comment below.
2. Investing in Real Estate or REIT shares(Real Estate Investment Trusts)
Interesting question right.. before we deep-dive let’s understand the difference between the two.
Real estate and Real Estate Investment Trusts (REITs) are both popular investment options for those looking to diversify their portfolios. While both offer the potential for strong returns, there are pros and cons to each option.
Physical Real Estate
Investing in Physical Real Estate involves purchasing the property directly and managing it yourself. The potential benefits include potential rental income, appreciation in property value, and tax benefits to reduce taxable net income. However, there are also risks to consider, such as the need for a large upfront investment, potential difficulties finding tenants, property maintenance and repairs, and the lack of diversification in owning only one property.
REITs(Real Estate Investment Trusts)
REITs, on the other hand, allow investors to own shares of a company that owns and operates real estate. Benefits of REITs include easy diversification across a variety of real estate sectors, a lower initial investment, professional management of properties, and regular dividends. However, investors have less control over the properties owned by the REIT, and there may be a lower potential for capital appreciation compared to direct real estate investments. Additionally, investors should consider the fees associated with investing in a REIT.
When deciding between investing in real estate directly or through a REIT, it’s important to consider your investment goals, risk tolerance, and level of experience. Both options offer the potential for strong returns, but each has its own set of pros and cons to consider. It’s also possible to invest in both real estate and REITs to diversify your portfolio even further.
What about ETFs?
Here they are. The top 3 ETFs are Nuveen Short-Term REIT ETF (one-year return of 7.7%), Invesco KBW Premium Yield Equity REIT ETF (4.7% return), and SPDR Dow Jones REIT ETF (4.5% return)
Conclusion: Recession Proof Investing by Identifying Real Assets vs Fake Assets
Recession Proof Investing by identifying Investing In Real vs Fake Assets can provide investors with various benefits and drawbacks. It is essential to understand the risks and benefits of each investment type to make informed investment decisions. Investors should consider their investment goals, risk tolerance, and financial situation before investing in either real or fake assets.
The major risk that you live in today’s uncertain environment is
“If your country becomes bankrupt, Gold EFT or REIT paper may not have any value as compared to physical assets like Gold or Real Estate”.
Investors who prefer physical assets may prefer to invest in gold, while those who value liquidity and diversification may prefer investing in gold ETFs. Hope you liked our article on how to Recession Proof Investing and identify Real vs Fake Assets. Leave a comment and it will encourage us to bring more such topics.
FAQs: Recession Proof Investing
What is recession proof investing?
Recession proof investing refers to investment strategies or opportunities that are less likely to be affected by an economic downturn or recession. These investments can include stocks, bonds, mutual funds, and other assets that are relatively stable or less sensitive to market fluctuations.
How can I identify recession proof investments?
You can identify recession proof investments by looking at historical performance during past economic downturns, analyzing industry trends and forecasts, and consulting with financial advisors or investment professionals. It is important to conduct thorough research and diversify your portfolio to minimize risk.
Is it possible to completely recession proof my investments?
It is not possible to completely recession-proof your investments, as even the most stable investments can be impacted by a severe economic downturn. However, you can minimize the impact of a recession by diversifying your portfolio, investing in a mix of assets that are less sensitive to market fluctuations, and staying informed about economic trends and developments.
What are the risks of recession proof investing?
One risk of recession-proof investing is that these investments may offer lower returns compared to more volatile assets during periods of economic growth. Additionally, some recession proof investing ideas may be overvalued during times of economic uncertainty, leading to potential losses if the market shifts unexpectedly. It is important to balance risk and return when building a recession proof investing portfolio.
What is inflation meaning?
Inflation is a general increase in the price level of goods and services over time. This means that the purchasing power of money decreases as the cost of living increases.
Inflation can be caused by a variety of factors, including an increase in demand for goods and services, a decrease in the supply of goods and services, an increase in the cost of production, or changes in government policies such as changes in interest rates or money supply.
Inflation is typically measured using the Consumer Price Index (CPI), which tracks the changes in the prices of a basket of goods and services commonly consumed by households.
Inflation can have both positive and negative effects. On one hand, it can stimulate economic growth by encouraging spending and investment. On the other hand, it can reduce the purchasing power of money, increase the cost of living, and make it more difficult for people to save and plan for the future.
How can I protect my investments from inflation?
To protect your investments from inflation, you can consider investing in assets that tend to perform well during periods of inflation, such as stocks, commodities, and real estate. You can also invest in inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS), which provide a guaranteed return above the rate of inflation. Additionally, you can diversify your portfolio and regularly review and adjust your investments to stay ahead of inflation.
What are some examples of goods that are impacted by inflation?
Goods impacted by inflation include food, housing, energy, healthcare, and education. These items are often necessities that people need to purchase regardless of price increases, making them particularly vulnerable to inflation.
What Are The Best-Performing REITs of 2024?
The top three stocks of REIT companies are Getty Realty Corp (one year return – 36.30%), Service Properties Trust (one year return -36.30%), and VICI Properties, Inc. (one year return of 27.10%)
What is REIT and how does it work?
A REIT, or real estate investment trust, is a company that owns, operates, or finances income-generating real estate properties. REITs can invest in a range of properties, including commercial buildings, residential properties, and industrial facilities.
REITs generate income by renting out their properties and collecting rent from tenants. They then distribute a portion of this rental income to shareholders in the form of dividends. By law, REITs must distribute at least 90% of their taxable income to shareholders each year.
There are several types of REITs, including equity REITs, mortgage REITs, and hybrid REITs. Equity REITs own and operate income-generating real estate properties, while mortgage REITs invest in mortgages and other real estate debt. Hybrid REITs combine elements of both equity and mortgage REITs in their investment strategies.
What are the benefits of investing in a REIT?
Investing in a REIT can provide several benefits, including exposure to the real estate market, a steady stream of income through dividends, and diversification of your investment portfolio. REITs can also offer liquidity, as they are publicly traded on stock exchanges.
What are the risks of investing in a REIT?
Like any investment, investing in a REIT comes with risks. One potential risk is the fluctuation of real estate values, which can impact the value of the REIT’s underlying properties and, therefore, the value of your investment. Another risk is interest rate fluctuations, which can affect the REIT’s borrowing costs and potentially impact its profitability.
Are REIT dividends taxable?
Yes, REIT dividends are taxable as ordinary income. However, certain REIT dividends may be eligible for a reduced tax rate under certain conditions, such as those paid from qualified dividends or those designated as capital gains dividends.
Disclaimer : Author is not a financial advisor. It is recommended that investors do their own research and consult with a financial advisor before making any investment decisions.
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Deven JANI
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