The following is an excerpt from The 5 Best Investments You Can Make in 2019
Everyone is looking forward to 2019 if only because 2018 has been so ugly. But investors will have to mentally sturdy themselves: Before we can talk about the best investments to make in 2019, we have to quickly explore what has gone wrong in 2018.
The year started with a bang. The Standard & Poor’s 500-stock index returned nearly 6% that month following an epic 2017 that saw the index pop by 22%. But after that, it got rocky. Stocks stumbled in the first quarter, rallied for most of the second and third quarters, then rolled over and died again in October. It hasn’t gotten better since, and investors have had plenty to digest the whole way.
Much of the massive gain in 2017 was likely powered by investors looking forward to the profit windfall following the corporate tax cuts at the end of last year. But that’s a year in the past. Going forward, we’ll be comparing post-tax-cut profits to post-tax-cut profits as opposed to higher post-cut to lower pre-cut. Meanwhile, stock prices are still priced for perfection. At 2 times sales, the S&P 500’s price-to-sales ratio is sitting near all-time highs, and the cyclically adjusted price-to-earnings ratio, or “CAPE,” of 29.6 is priced at a level consistent with market tops.
Fortunately, the new year provides an opportunity to wipe the slate clean. So what might we expect in the new year? Today, we’ll cover five of the best investments you can make in 2019, come what may in the stock market.
It’s difficult to beat the stock market as a long-term wealth generator. At roughly 7% annualized returns after inflation, the market has historically doubled your inflation-adjusted wealth every 10 years. No other major asset class has come close.
Still, you shouldn’t put all of your money in the stock market.
To start, there is no guarantee that the future will look like the past. The stock market as an investment destination for the masses is a relatively new concept that really only goes back to the 1950s, or perhaps the 1920s if you want to be generous. You can’t credibly say that the market “always” rises with time because, frankly, we’re writing history as we go.
Bonds have a longer track record, but bonds are also priced to deliver very modest returns in the years ahead. Adjusted for inflation, the 3% yield on the 10-year Treasury looks a lot more like a 1% yield.
Investors should consider alternative strategies as a way to diversify while not sacrificing returns.
“Alternative” can mean different things to different investors, but for our purposes here we’re taking it to mean something other than traditional stocks and bonds.
Alternatives could include commodities, precious metals and even cryptocurrencies like Bitcoin. But more than exotic assets, an alternative strategy can simply use existing, standard assets in a different way.
“The vast majority of options contracts expire worthless,” explains Mario Randholm, founder of Randholm & Company, a firm specializing in quantitative strategies.
“So, a conservative strategy of selling out-of-the-money put and call options and profiting from the natural “theta,” or time decay, of options is a proven long-term strategy. You have to be prudent and have risk management in place, as the strategy can be risky. But if done conservatively, it is a consistent strategy with low correlation to the stock market.”
That’s a more advanced way to skin the cat. But the key is to keep your eyes open for alternatives with stock-like returns that don’t necessarily move with the stock market.
To continue reading the remaining four investments, see The 5 Best Investments You Can Make in 2019
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.
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