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    A Primer On Investing For Inflation-Adjusting Income

    How to build sustainable passive investment income
    by Adam Taggart

    Friday, February 1, 2019, 12:11 PM

Executive Summary

  • Understanding the benefits and risks of the notable options for passive income:
    • Cash & Cash Equivalents
    • Bonds/Loans
    • Dividend-Yielding Stocks
    • Real Estate
    • Business Ownership Through Private Equity/Private Placements/Local Investing
    • Royalites
    • Annuities

If you have not yet read Part 1: The Primacy Of Income, available free to all readers, please click here to read it first.

In Part 1, we laid out the rationale for why investing for income is becoming more important than ever as the Era Of Gains draws to an end.

Those who put in place a diversified portfolio of relatively low-risk passive income streams, inflation-adjusting and tax-advantaged wherever possible, should be much more financially resilient than the general masses after today’s Everything Bubble ruptures.

The good news is that there’s a variety of options worth considering when constructing such a portfolio of income streams. Here in this primer, we identify many of the most noteworthy along with their general benefits and risks.

The challenge, of course, comes in the application of this information. Which options are best for you, given your specific situation, needs, goals, and risk appetite?

As always, let me make a few things absolutely clear. The information presented below is NOT personal financial advice and is provided for educational purposes only.

And as always, we recommend working with a professional financial adviser to build an investment plan customized to your own needs and objectives. (If you do not have a financial adviser or do not feel comfortable with your current adviser’s expertise in the market risks we discuss here at PeakProsperity.com, consider scheduling a free consultation with our endorsed adviser)

Suffice it to say, any investment ideas sparked by this report should be reviewed with your financial adviser before taking any action. Am I being excessively repetitive here in order to drive this point home? Good…

With the above said, the primer below should give you plenty of food for thought for how you may wish to design your own income-generating portfolio. Explore the options of greatest interest to you, and feel free to let us know in the Comments section below which ones you would like to see explored in further depth on PeakProsperity.com in the future (dedicated articles and/or podcasts and webinars with experts).

“Financial independence” is defined by most as having enough passive income to cover all of your living expenses. While a worthy goal for all of us, even partially achieving that state will make your life tremendously less stressful than the hundreds of millions (in the US alone) who fall far short of it — and will only fall farther behind during the next deflationary wave when asset prices fall, job losses spike, and government subsidies become more scarce.

A Word On Timing

“Buy low, sell high” is the age-old mantra of the investor looking to profit from big gains.

Over the past era of central-bank blown bubbles, almost any time has been “a good time to buy” because the huge amounts of liquidity have pushed asset prices ever-higher. Today’s prices have almost always been lower than tomorrow’s prices for nearly a decade now, embolding investors to see every dip as a buying opportunity (BTFD!).

As stated, we think that the long-running Era of Gains and its related hubris will vaporize when the current bubble pops, sending prices plummeting.

The primer below walks through a number of assets that, when purchased, entitle the buyer to income produced by the underlying assets. While that income is desirable (and likely to become even more so for the reasons enumerated in Part 1), it’s important to keep in the mind that the underlying assets have value, too.

So it’s important not only to ask: Am I receiving an acceptable amount of income? when looking at these investment options. You also need to ask: Am I acquiring this income at an acceptable price?

Simply put, should a major market correction/crash occur, income-producing investments should be a better value than they are today. You’ll be able to secure the same amount of income (or more) at lower prices.

While no one has a crystal ball that can predict exactly where market prices are headed and when, there is currently a preponderance of evidence that we are in the final stage of one of the most over-valued periods in the history of financial markets.

So there’s a good argument to be made for waiting until a market-clearing event occurs before deploying too much of your capital towards income-generating assets. Playing it safe on the sidelines and using your time today to do your research and identify your target list of purchases is a sound strategy.

First, Don’t Ignore Your Active Stream(s)

Before we get to the passive options, be sure not take your eye off your active income stream(s).

For most people, your primary job will be your greatest source of annual income. So nurture that as best you’re able to. Make sure to stay sufficiently skilled and respected in your field, in order to be able to command a fair rate for your services up until the time you stop working.

Do the math. For as long as you expect to keep working, how much income can you expect to bring in?

Now see if you can slant the odds to your favor. Could you boost that income total? Perhaps by:

  • Increasing your salary — advancing via promotion, acquiring more marketable skills, transferring to a higher-paying job
  • Working for longer — would you benefit materially from working a few years longer at your primary job than you initially planned, perhaps on only a part-time basis?
  • Adding a side gig — picking up part-time/flex work when convenient (consulting, project-based work, Uber, etc)
  • Additional spousal income — does your S.O. have the potential to work more/earn more?

Any additional increase in your total active income will reduce your demands for passive income. You might choose not to make this trade-off for quality of life or other reasons, but it’s worth going through the exercise.

And obviously, today’s income only helps out your future prospects if you save it. So creating a monthly budget to know accurately what your current savings rate is (both in total $ and in % of income) and then challenging yourself to increase it going forward is another key discipline to adopt.

Investing For Passive Income

Retirement Vehicles

First off, estimate how much income you can expect to draw annually from any retirement vehicles you have in place. As we detailed in our recent report on retirement, for the vast majority of folks, these will be insufficient — likely much to insufficient — to cover projected annual living expenses:

  • Social Security — nearly all US seniors will qualifiy for Social Security payments. Your payments will largely depend on the amount of SS taxes you paid into the system during your career, with a current maximum monthly payout of $3,750. Social Security payments sometimes are increased annually by a cost of living adjustment (COLA), but the pace has been very slow historically vs actual inflation (for the first 40 years of the program, there were no adjustments made for inflation). There are mounting concerns about the long term dependability of Social Security, as the SS fund itself has been fully raided over the years to pay for Congress’ wars and programs.
  • Pensions — pensions, especially private-sector ones, are not nearly as prevalent as they were in the past. If you have one, contratulatons! It’s the equivalent of having several million in T-bills at today’s current rates. But not all pensions are created equal, and many pension plans are dangerously underfunded or destined for insolvency. If you are expecting to receive a pension, be sure to ask your plan for the details on its current funding ratio (anything under 80% is concerning) as well as its future funding projections.
  • Retirement plans (401ks, IRAs, etc) — for those not counting on a pension, a rough rule of thumb is to have 25 times your annual income saved up by the time you want to retire. Most Americans fall far short of this goal. How short? Well, the median amount saved in a retirment plan among working US adults, even among the near-retirement 55-64 age cohort, is $0. How far short are you right now?

Cash & Cash Equivalents

These are the “safest” investments for income (i.e., least likely to result in the loss of your principal). As such, their expected returns are the lowest vs other options.

  • Bank savings accounts — The most liquid way to store cash. During the record-low interest rates of the past 7+ years, bank savings rates have been insultingly low, around 0.06%, vastly underperforming inflation. Savings rates are getting slightly better, with a number of banks offering teaser rates (usually only for new deposits) as high as 2%. Cash stored in a bank savings account is subject to any bank failure/bail-in risk higher than the FDIC coverage limit.
  • Money Market accounts — Banks and brokerage firms both offer these MMAs to their customers. They offer slightly higher interest rates than traditional savings accounts because they demand a minimum balance and limit the number of withdrawals a customer can make in a given month. As with savings accounts, MMAs are subject to any bank/brokerage failure higher than the FDIC/SIPC coverage limit.
  • Bank Certificates of Deposits (CDs) — Similar to a bank savings account except your money is ‘locked up’ with the bank for a period of months (most commonly 1, 3, 6, 12, 24, 36, 48 & 60). For the right of using your savings during this period, the bank pays you a higher interest rate. The best rates on the market today range between 0.6% for 6-mo CDs up to 3% for 60-mo ones. Cash stored in a bank CD is also subject to any bank failure/bail-in risk higher than the FDIC coverage limit.
  • US Treasury Bills — Currently, you can get notably better returns from 4-week to 1-year T-bills than from bank CDs or savings. Current yields range between 2.2%-2.7%. Moreover, you avoid the risk of bank failure/bail-ins. You can purchase T-bills directly from the US Treasury through its TreasuryDirect program, which we’ve written about extensively here. As long as you hold them to maturity, which is easy given their short durations, you’ll receive the promised yield (usually paid up front) and all of your principal back. Income received from T-bills is tax-free at the state & local levels (though remains subject to federal tax).

Bonds/Loans

These are debt instruments (essentially an IOU) that give you a regular payment (called a coupon) while the debt is outstanding. You can either hold the bond all the way to its maturity, at which time you’ll receive your principal back, or you can sell the bond in the open market at its current market price.

A key fature to know about bonds is that they are highly sensitive to interst rates. As interest rates go up, bond prices fall.

Owning a bond is attractive for the income it kicks off. Your money is “making money” for you. But should interest rates rise substantially after you buy a bond you have to be aware of the implications. If you sell the bond before its maturity, you very likely won’t get all of your principal back and experience a capital loss.

Bond math can be a little tricky, which is why we highly recommend working under the guidance of an experienced professional financial advisor when developing the bond part of your portfolio. (for the DIY crowd, here’s a handy online calculator for running sensitivities)

  • Sovereign debt — these are longer-term (>1 year) notes and bonds issued by the governments of the world (e.g. US Treasury bonds, UK gilts, German bunds). Their markets are usually highly-liquid, and default risk is very low for the major developed countries. The longer the bond duration, the higher the return (the 30-year US Treasury bond is yielding 3.4% right now). And the riskier the country, the higher the return (Argentina’s 10-year bond is currently yielding over 20%). Those investing for dependable income should stick to the most stable countries.
  • Municipal debt — these are bonds issued by a state, munipality or county to finance its capital expenditures, usually tied to a public project like a roadway, school hospital, etc. Income from many muni bonds are exempt from federal taxes. While generally considered ‘safer’ debt to hold vs private debt, munis can be defaulted on (e.g., Detriot, Puerto Rico) and may experience lower trading liquidity.
  • Corporate debt (above BB/Ba rating) — companies raise debt for all sorts of reasons. An since companies don’t have the power to print money like sovereng government or tax their citizens like munipalities, corporate debt coupon rates are higher. The major ratings agencies like Standard & Poors and Moodys evaluate how ‘risky’ these companies are — the more risk, the higher the return the bonds should offer. It’s important to know that if the company issuing the debt gets into trouble, such as bankruptcy, as a creditor, you could lose some or all of your principal (though any funds will be paid to you before the company’s stockholders). Again, those investing for dependable passive income should largely stick to debt issued by blue chip companies with healthy balance sheets.
  • Diversified short term private mortgage funds — these are short-term private loans made for the purchase and/or renovation of real estate. These loans are secured by the underlying real estate assets, are typically 1-3 years long, and currently have interests rates ranging between 7-12%. They aren’t for everyone; only accredited investors shoud consider making these loans directly (most won’t let non-accredited investors participate). More on these loans can be learned here.
  • High yield bonds and peer-to-peer lending — these are debt/loans the offer higher interest payments because, surprise, they come with higher default risks. High yield bonds (ratings BB/Ba or lower) are also referred to as “junk bonds” and are not a good fit for an income portfolio that prioritzes safety of that income stream. Those with sizable wealth and an already widely-deversified portofolio may want to explore holding a small percentage in a high yield ETF like JNK to get a little extra yield and a little extra diversification, but that will be a minority of folks reading this. Peer-to-peer lending platforms like Prosper have offered historical average returns of 5.5%, but are so new that they are unfamiliar to regulators and untested by a major market correction/recession. Proceed with caution if you explore this space.

Dividend Yielding Stocks

While stocks are currently at risk to lose a lot of their value in the event of a major market correction, after that correction, there still will be operating companies and there still will be a functioning economy (and if there isn’t, we all have bigger problems).

And even if the next decade doesn’t see much price appreciation in stocks, there will be solid companies offering dividends. It’s important to keep in mind that nearly 70% of the stock market’s total return over the past 40 years has come from dividends vs price appreciation, as hard as that may be to believe.

So, presuming the Everything Bubble bursts in the next 0-3 years, there should be a good opportunity to purchase income at much better valuations than today. And still have the potential for share price appreciation on top of that.

There are number of ways to get equity income in the public markets:

  • Dividends from Blue Chips & Utilities — Look for stable, long-standing businesses in the “cash cow” stage. These are stocks that tend be a lot less speculative with dependable positive cash flows. There are a number of lists screeners out there you can find online to identify the best prospects. Today’s popular blue chip stocks are offering dividend yields in the 5.5-7% range. Similarly, large utility companies tend to offer reliable dividends while remaining lower risk (though risk can sometimes strike — just look at PG&E which has recently lost nearly 50% of it’s stock price due to it’s supposed culpability for the recent massive California wildfires).
  • Income funds — Many investors prefer to avoid the hard homework and uncertainly involved in buying specific stocks and instead prefer to buy shares of income funds, where the index/fund manager does the legwork for them and rebalances the fund over time. Income funds can specialize in generating income from dividend stocks, bond yields, or a mixture of both.
  • Preferred stock — preferred stock is a class of stock that has higher priority (e.g., liquidation rights) than common stock. It often comes with a higher dividend than offered on common shares. While you can buy preferred shares directly, they’re a little tricker to obtain for the average investor. Income investors may find it easier and less stressful to instead buy shares in a fund that owns preferred stock across a number of companies sectors. PFF is the largest such ETF on the market, currently paying a yield of roughly 5.75% (PGX and FPE are other large peers).
  • Covered calls — If you happen to own a large position of a certain stock, say, received as a grant from the company you work for, there’s a way to generate income from that position by writing covered calls. By doing this, you’re selling call options against your holdings — a bet that your holdings are not going to spike up in price anytime soon. Those who buy your call options pay you today for that privlege. If the stock stays roughly flat or declines, you still own all your shares + the income you received. However, if the stock spikes above the exercise price on your call, you are obligated to sell your shares at the exercise price: meaning you’ve lost the upside vs the higher new price. This is a good solution for folks sitting on a large position they’re not willing to part with yet, but who want income with very limited downside. Or, as with preferred stock, you can own shares in a fund (PBP is an example) that is fully-focused on writing covered calls against its own positions.

Real Estate

Investing in income-generating properties is one of the most tried and true formulas for accumulating wealth over the centuries.

That remains true today, although just as for the publicly-traded markets, timing is important. Right now, property price bubbles are rampant again around the world, and as we’ve been covering here at Peak Prosperity, unafforabaility, rising interest rates, and increasing controls on global capital flows currently appear to be causing those markets to nose over.

Those with an income focus (vs flipping) may have the opportunity to pick up excellent values if real estate prices experience another correction like they had in 2007-2009. And should that happen, and the Fed then drop interest rates again in attempt to goose the economy, there may be a rare window to purchase at both low prices and low mortgage rates. Such a window of opportunity won’t last long; those who are positioned in advance will be the ones to take advantage of it.

We here are Peak Prosperity believe that real estate as an investment class has a role to play in many people’s portfolios. Expect to see more dedicated articles, podcasts and webinars on the topics below in 2019.

  • Direct ownership — this is you buying and managing properities yourself. It can be lucrative and rewarding, especially as your property portfolio and its associated income grows. There are lots of favorable elements in current tax laws that are very preferential to property owners (bonus depreciation being just an example) that add to real estate’s wealth-building benefits. But it’s certainly not for everyone; not everyone was meant to be a landlord. Good resources for those looking to learn more about how to successfully invest in real estate are this book and this podcast series.
  • Participating in a syndicate — you can also own specific real estate property much more passively, as an investor in a syndicate. A sydicate is a private deal where the managing partner finds a property and buys it with funds from a pool of investors. S/he manages the property for you; you simply collect a check of your pro rata share of the income (and any pro rata tax breaks) that the building spits off. There are lots of books written on how to participate in, or lead, a syndicate; and a good seminar on the topic is offered by our friends, The Real Estate Guys.
  • Real Estate Investment Trusts (REITs) — these are larger funds that own and manage holdings of income producing real estate. Most are public and you can buys shares in them in the open markets just as you can a standard mutual fund. These are good vehicles for folks looking for income, want broad diversification (number and types of properties, geographies, etc) across real estate as an investment class, and who don’t want the obligation of property management themselves. They are also extremely liquid compared to direct ownership and syndicates.

Business Ownership Through Private Equity/Private Placements/Local Investing

Owning a stake in a private (i.e. not publicly-traded) income producing business can be achieved via a number of routes. Many brokerages/financial advisory firms can highlight private placement offerings to their clients who qualify. Those with high enough net worth can invest directly with a private equity firm; the rest of us can buy shares in the publicly-traded firms that make private equity investments (like Blackstone and KKR).

Many commodity-based companies like mines and energy plays raise capital in private deals. At the resource conferences that Chris and I attend, there are always lots of these companies looking for investors. Caveat emptor; there are a lot of projects that will never pan out. But those that do can be extremely lucrative for a long time. A prolific oil & gas well can yield generous annual income for years/decades, along with tax breaks against that income.

And in your local area, business brokers and service clubs (like Rotary) can connect you with stable, profitable businesses in your area that are raising capital. You can even knock on the door of local companies you like and simply ask what their funding needs are — many of these smaller deals are started on and maintained by relationship. Yes, there’s a whole different set of dynamics when investing like this, but with rigorous enough due diligence, you can have an investment where you have more visibility and influence than any publicly-traded stock you’ll ever own. Plus, by strengthening the prospects of a local business, you’re strengthening the resilience of your community.

Royalties

Royalties are payments you receive for allowing someone to use property that you own or control, for a period of time. Most often, this is on intellectual property: copyrights, patents, and trademarks. Music, artwork, franchises, mineral rights, etc are common examples.

Why royalities? Royalites are not very correlated with the financial markets, which is good for diversification. Payments are a direct function of how often the property is used (i.e., how popular it is). For example, every time a song is listened to, a royalty payment to its rights owner is incurred.

Those interested in owning royalties should not make them a sizable portion of their portfolios until they have suffience experience with them as an investor. To learn more about the dyanmics of how they work and the pros and cons to mindful of, read this article.

Royaly-producing assets can be purchased through private transaction or via exchanges. A prominent music exchange, RoyaltyExchange gives investors the options to purchase individual assets directly, or to participate in syndicates with other investors to own a slice of large assets (multi-million$).

Annuities

Annuties have been around since Roman times. They are a contract, typically between you and an insurance firm, where for a lump payment (or series of payments)  today, you purchase a guaranteed future revenue stream.

There are various types of annuities, most commonly devised for principal protection, lifetime income, estate planning or long-term medical care cost coverage.

Annuties can be structured a number of ways, too — so this sector can be a bit complicated. Payouts can start immediately or be deferred by decades, can be fixed or vairable, and can be associated with tax breaks and/or life insurance aspects. It’s highly recommend you have an experienced financial advisor to guide you when navigating the many offerings here.

A lot of advisors have reservations about annuities, and rightly so. Commissions and annual fees can be rapciously high (and hidden). There are early withdrawal penalties. The income stream “guarantee” is only good as long as the underlying insurance company remains solvent. Fixed annuity payouts become less attractive as interest rates rise. Variability annuities are subject to market risk. In most cases, the expected return from annuities is lower than investing the same capital directly into the markets.

But to this last point: if we are indeed entering an era of “price appreciation drought”, when the market return could be 0% over a decade, a modest but steady payout stream will look awfully appealing in comparison.

Those looking to learn more about annuities should read this primer first, and if further interested, schedule a talk with a professional financial advisor with at least a decade of experience dealing with them for clients.

Be Sure To Also Focus On Minimizing Your Cost Footprint

All the above focuses on the income side. Focusing on the costs side is just as important, as you make your income go farther the fewer demands you place on it.

And unlike the markets, which no one can predict; you have much more control over your costs.

First, revisit your annual budget to make sure you have crystal clarity on all your living expense line items.

Then challenge yourself to reduce extraneous expenses. What expenses can you cut back on/remove entirely while putting the difference into savings, without suffering an unacceptable drop in quality of life?

Most people actually find that by economizing they simplify their lives, thus enjoying higher savings and peace of mind together.

This process may force some emotion-packed decisions, especially when it comes to big expense line items like housing costs.

  • Does downsizing to a smaller property make sense? It usually does for empty-nester couples whose adult children are out of the home.
  • Would moving to a more affortable region (lower housing values, lower property taxes, lower/state income tax, etc) materially extend the years covered by your expected passive income? If you live in states like California, Illinois, New Jersey or Massachusetts, the answer may very well be “yes”.
  • Do you have family/friends who would be willing to co-habitate with you? Multi-generational living was the norm in previous generations. We’re big fans of it here at Peak Prosperity for its social and cultural benefits, beyond the substantial cost savings it can offer.

For additional ideas on ways to reduce your living expenses, read this.

Finally, adopt Thoreau’s mindset. He had a wonderful quote that each of us can benefit from remembering: I make myself rich by making my wants few.

The less you desire, the less you need. So focus on the things that truly matter (relationships, connection with nature, time for oneself, etc) — you’ll find most of them don’t require a lot of income to maintain. And let the rest fall away.

Conclusion

If you’re reading this — congratulations! You’ve successfully made it through quite a long report.

The big takeaways here are that income-investing is becoming much more important, particularly for folks approaching retirement age — and the time to start developing your strategy for it is now. You want to be prepared to act with decisiveness and clarity not if but when the Everything Bubble finally bursts.

The litany above should give you hope that there’s a wide range of solution options above to evaluate and consider. Again: work with an experienced professional financial planner, especially regarding options with which you have little to no prior familarity.

Whether you work with them or not, the advisor Peak Prosperity endorses, New Harbor Financial, will be happy to address any questions you have about your retirment/passive income plans. You can schedule a time to talk with them (completely free) by clicking here.

And if you’d like to see future reports/podcasts/webinars on this site offering a deep dive into any of the income-generating asset classes mentioned above (or any we neglected to list), please let us know in the Comments section below.

cheers,

~ Adam

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14 Comments

  • Sat, Nov 17, 2018 - 12:50pm

    #1

    charleshughsmith

    Status: Bronze Member

    Joined: Aug 15 2010

    Posts: 709

    0

    the difficulty in assessing risk

    Solid overview of a complex topic, Adam.  I think one of the toughest tasks for anyone with capital to invest in an income stream is assessing the risk that the income could drop or the asset becomes impaired and stops paying out.  Junk bonds are notorious for defaulting in recessions, but shaky sovereign debtors can also default or write down their debt. Blue chip companies like GE can slip into crisis / over-indebtedness and slash their dividend.  Rental housing can be impacted by widespread regional job losses, and commercial properties that looked rock-solid in good times end up producing expenses rather than income when major tenants go bankrupt and there are no replacement tenants in sight.
    Even worse, the rules may change as local authorities seek higher tax revenues from "the rich", i.e. anyone who owns income-producing assets. Property taxes on commercial rental property could double overnight, handing the owners losses instead of profits to be divvied up. Business license and other fees can double overnight even as tenants go broke or vacate. Tax authorities habitually raise taxes on gross income, not net income, meaning even businesses losing money must pony up higher taxes and fees.
    If our authorities continue under-reporting inflation, Treasury yields might rise to 4% for long-duration bonds but if real inflation is running at 6%,  over time the purchasing power of the income declines.
    All of which is to say that risk cannot be eliminated, it can only be assessed, and that is an imprecise calculation. 

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  • Sat, Nov 17, 2018 - 8:56pm

    #2
    dragonfishy

    dragonfishy

    Status: Member

    Joined: Jan 01 2011

    Posts: 63

    0

    counterparty risk, permanent impairment of an asset

    Good work Adam, and I have to admit I have not been focussed enough on income producing assets. My concern is that there is little that is cheap out there in the "everything bubble" inflated landscape, and that in the coming "great reversion to the mean" counterparty risk, and permanent impairment of any of these fiat money denominated assets may prove a real issue. 
    At risk of sounding a gold/silver bug. I'm betting that saving in physical metal and waiting out the carnage may be a safer approach. After that, income producing assets, in whatever counts for currency, will be pennies on the dollar of what they are now.
    Paul

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  • Sun, Nov 18, 2018 - 9:43am

    #3

    Adam Taggart

    Status: Platinum Member

    Joined: May 25 2009

    Posts: 7556

    0

    Risk, Timing & Safe Havens

    Charles:
    I wholeheartedly agree that those investing for income need to understand the inherent risks involved in the vehicles they put capital into. Hopefully this primer serves as a starting off point for that journey, as well as any following 'deep dive' reports this website conducts into the options that readers express most interested in.
    That said, I'll just state the obvious that every investment decision comes with risk. Even sitting on the sidelines in fiat cash, there's currency/inflation risk.
    My general thesis with this latest 2-part report is to highlight that a gains-based approach (i.e., counting on appreciation to build wealth) will be a lot riskier going forward, without the central banks committed to supporting it with fresh $trillions year after year as they have been up until now.
    In a nutshell: prioritize "safe income" over "speculative growth" in this new era.
    And for the vast majority of us, as we look to build income streams:
    diversify
    stick to the safer/conservative side of the spectrum (blue chip dividends, developed nation soverign debt, etc)
    don't got it alone. Work under the guidance of experienced professionals (financial advisors, seasoned real estate investors, etc) in the areas in which you don't have substial prior experience

    You're right: risk can't be eliminated and the rules are highly subject to change. But those following the above will be a lot less vulnerable to those factors versus those who don't.
    -------------------------------
    Dragonfishy:
    I'm in complete agreement. Hopefully my warnings about current overvaluations and advocation for waiting for the Everything Bubble to burst (so that income streams can be afterwards purchased at much better value) came through clearly in the report above.
    Being transparent: in my personal portfolio right now, my #1 position is T-bills and my #2 position is precious metals.
    While I wait for the next market correction, the T-bills are giving me some welcome income now that they're yielding over 2%. While not exceeding reported inflation (and certainly not beating what I believe to the true inflation rate), I'm content getting paid to wait.
    And if the whole system suddenly goes to hell in a handbasket (i.e., deflationary meltdown or the central banks panic and send us straight into the POOM phase), my PMs should hopefully serve as a backstop -- preserving and quite possibly appreciating substantially in purchasing power.

    REMINDER: This is NOT personal financial advice. The investment choices I've made are based on my own unique situation, financial goals and risk tolerance. And I may change these choices at any moment given new market developments. What's appropriate for me may not be for you, so DO NOT blindly duplicate what I'm doing.

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  • Sun, Nov 18, 2018 - 12:43pm

    #4

    Eannao

    Status: Bronze Member

    Joined: Feb 28 2015

    Posts: 226

    0

    Bank account with 2% interest

    Adam,
    Online bank 'Ally' offers 2% interest, not as a teaser but on-going.
    Their Texas Ratio is good, so they should be relatively safe.

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  • Sun, Nov 18, 2018 - 1:00pm

    #5
    aball1035

    aball1035

    Status: Member

    Joined: Dec 19 2014

    Posts: 12

    0

    Asset prices

    Adam, thank you for this! A couple questions:
    1. What's the relationship with housing/stock prices dropping and the Fed's attempt to prop them up? For example, is it possible that asset prices never drop due to the Fed injecting money into the system?
    2. During a meltdown, what happens to gold stocks if gold rises? Would they rise with gold, or, being just paper, fall with the market?

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  • Tue, Nov 20, 2018 - 5:05am

    #6
    yagasjai

    yagasjai

    Status: Member

    Joined: Apr 18 2009

    Posts: 156

    0

    Requests

    Adam,
    Thanks so much for putting this report together. As a layperson, with a sincere interest in better understanding the ins and outs of diversifying my income streams, I would like to know more about real estate. Specifically the piece you said above about the possible window coming if prices drop and interest rates drop as a good time to buy if you are positioned in advance. I'd like to know how one needs to be positioned- if it is just having cash on hand either in savings or T-bills that you can use, or being pre-approved by a lender, or having in depth knowledge of the area you want to buy in, or if there are other things I'm not thinking of.
    I would also like to know more about investing in local businesses and picking stocks (for after the deflation). How would a layperson go about developing the skills to do one's "due dilligence" in terms of evaluating the soundness of of different options? I often see that term thrown around and it's not always clear to me how one goes about developing the skills to actually apply it to a given situation, whether it is evaluating a local company to invest in or evaluating a stock to buy. Those of us without an MBA might like some help building those skills so that we can actually evaluate things for ourselves. 
    For myself, I can say that I did a "deep dive," as you say, into studying everything I could learn about how the monetary system works and the global economy, inflation, deflation, etc... about 10 years ago after the crash in 2008. I haven't been following things as closely in recent years because I have been busy working on building my resiliency, increasing my income, and savings, reducing debt etc... But I am paying much closer attention again, now, and see that there are gaps in my understanding when it comes to things like learning how to pick a stock, or how to evaluate a local business. I know I can learn complex things by reading and studying websites like this one, but it would help if at some point you did something more in depth on how to develop the ability to do "due dilligence."
    Thanks for all you do. 

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  • Tue, Nov 20, 2018 - 6:47am

    zaphod4prez

    zaphod4prez

    Status: Member

    Joined: Jan 11 2016

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    Me too!

    Adam, I would also really like for there to be some more information & support re: real estate and investing in this site. I had been following the free parts of Peak Prosperity for years, and there was always mention of further investment guidance in the paid articles. Well, I finally bought a month-long paid subscription and was somewhat surprised and frustrated to find that there really is minimal guidance in terms of how to handle your current wealth... it’s just a constant drum of plugging the “recommended financial advisors.”
    i really appreciate what you guys are doing, I genuinely think it’s a service to the world, but I also think that some of the advertising for membership is deceptive; I really didn’t expect that from you guys.

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  • Tue, Nov 20, 2018 - 10:39am

    thc0655

    Status: Platinum Member

    Joined: Apr 27 2010

    Posts: 2549

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    Specific, detailed investing education

    OTOH, I don't come here to be educated on the specifics and details of any kind of investing.  I come here for the macro picture and when I need details I find specialists in those areas (such as investing in gold and silver).  Don't get me wrong: I appreciate everything Chris and Adam teach us about, but I see them as generalists not specialists.  If I get specialized information from them or from a guest, that's great but I'm not expecting that.  

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  • Tue, Nov 20, 2018 - 10:53am

    Adam Taggart

    Status: Platinum Member

    Joined: May 25 2009

    Posts: 7556

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    Due Diligence

    yagasjai --
    Roger that.
    Many thanks for letting us know what you're specifially interested in learning more about. We do listen very hard to what our readers ask of us, and I use that feedback to priortize our content and site development efforts. So again, thanks for the request.
    Real estate is a large topic. One we can't cover comprehensively in a single report. So a series will be needed.
    I'm already in talks with our friends The Real Estate Guys to create a series of educational webinars for the PP audience on this topic. It will cover the different types of RE investment options, how to conduct the valuation process (building pro forma models, etc), how to raise capital, and how to recruit a team of experts to advise you.
    I don't have dates nailed down yet, but my hope is to have the first webinar in the series run in January, if not sooner.
    In the meantime, the book I linked to in the article above Equity Happens is an excellent resource for folks new to real estate investing. It's out of print, but you can still get a used copy online (Amazon, etc).
    As for the due diligence process, sounds like I should make that the focus of one of my next reports! I'll do just that.
    Just know that it's an exercise in probability. Meaning: it's a process of evaluation designed to enable you to make higher-confidence decisions. For example: How likely is this investment to succeed?
    But it doesn't guarantee success. There will always be risk.
    By doing quality due diligence, and doing more of it than less (exactly how much you conduct is up to you), you'll understand the risks more clearly, and be able to make better decisions as a result.

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  • Tue, Nov 20, 2018 - 11:15am

    #10

    Adam Taggart

    Status: Platinum Member

    Joined: May 25 2009

    Posts: 7556

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    Where The Puck Is Headed

    Tom & Zaphod --
    Tom's got it right. We're focused on macro developments and their likeliest implications, or as Gretzky put it: Where the puck is headed.
    How any given player should handle that puck, once they get it, is best left up to them -- where they are on the ice, where the defenders are, where momentum is taking them, the angle to the goal, etc. The "best" decision is different for every player.
    The latter gets into personal financial advice, which to give appropriately (and legally) requires sufficient knowledge of your unique financial situation (income, assets, liabilities, etc), goals, risk tolerance, etc; as well as SEC licenses.
    That's why we don't make specific stock picks and pressure you to follow them. It's why we don't ask for your money and then sell naked call options with it.
    It why we do evaluate and educate on asset classes and solutions that we think will do well given where the puck is going, and recommend folks work with a financial professional when it comes down to developing an investment action plan customized to your unique situation.
    And we're agnostic which advisor you use, as long as they at least have an understanding of the Three Es and they've sufficiently demonstrated to you that they are trustworthy and have your best interests in mind. We simply make folks aware of New Harbor because many tell us they have trouble finding a local advisor who meets these simple criteria. 

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  • Sat, Nov 24, 2018 - 1:33pm

    #11

    dtrammel

    Status: Silver Member

    Joined: May 03 2011

    Posts: 807

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    Invest In Yourself First

    Adam, you speak about investing in real estate, yet you didn't mention what many would consider the first step to investing in real estate, that is invest in yourself first. That is getting out of the renter trap and into owning your own home. I say home, and not house because for some a single family unit might not be the best fit in your situation. It might be as simple as a van or bus, tricked out as a place to live, a home with some land or something bigger, like an income producing place like a small apartment building, duplex or building with an apartment above a store.
    As long as you are paying someone else for the privilege then you are at the mercy of your landlord raising your rent or worse selling the place out from under you. And that includes the bank that holds your mortgage loan. If you still owe on that loan, then you still have a landlord, only one that makes you pay for the upkeep of their property.
    In a serious enough situation, like 2008, if your bank goes under you could find yourself not knowing who to send that payment to. There were horror stories of people in that situation, who months later were foreclosed on because they didn't know who now owned the note, and were therefore considered delinquent. Or worse, the new bank just robo-signing the foreclosure without paperwork.
    I plan on retiring in 5-6 years and will have my home paid off before I do. At least that bill will not be hanging over my head.
    As for local property taxes, not much I can do. Here they raised our rate substantially in 2009 because the county's tax revenue went down with business closings. I suspect they will do the same when the next bubble bursts.

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  • Sat, Nov 24, 2018 - 2:17pm

    #12

    dtrammel

    Status: Silver Member

    Joined: May 03 2011

    Posts: 807

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    Flip Side Advice - Get Out Of The Moneyed Economy

    Adam said: Additional spousal income -- does your S.O. have the potential to work more/earn more?

    A counter point to that advice might be for one of the two adults in a household to not work a standard job, but instead to adopt the position of "stay at home". This doesn't assume that it is the women in the relationship either. It could as easily be the man, or other SO in a nonM/F situation. There is alot of expenses relating to maintaining a household and family, that we tend to outsource to day care workers, or housekeepers now. How much of your family expenses could be saved if one member was there to do it instead? Would it be enough to forgo that second income?
    Being out of the 9-5 moneyed economy has an added advantage. You can develop outside incomes that don't depend on our current economic structure, and that would be still generating income if the economy does tank. Handicrafts, specialized niche businesses, contracting and side jobs, even old time skills like bake goods, sewing, minor repair and such that be paid in barter or trade.
    Its not just a matter of increasing the amount of money you make. Cutting costs and expenses, while seeming to be minor, can have a huge effect on how well you weather a downturn.
    The first step to any of this, is to audit your personal expenses, see where you are spending money unnecessarily and where you can cut back and save. Take a month and write down ever expense you have, from that morning coffee to the reoccurring bills like utilities. Don't try and make yourself look better either. Be honest. You might need to do it a second time a few months later, if you have large seasonal variations to things like heating or cooling cost.
    You should see where you can cut back on. And where you might need to spend more. Its all well and good to write down the amount of gas you buy, but you also need to take in account longer term bills. You'll need tires every few years, and have repairs to make. Establishing a monthly amount that you contribute into a rainy day fund for those type of occassional costs gives you a truer picture of your expenses and will help you create a more realistic budget.
    Don't forget to pay yourself first too. If you don't have an emergency fund of 2-3 months expenses, then you need to allocate money each week to build one. If you don't have the foundation of your financial house set in firm stone, then you shouldn't be looking to invest in higher risk things like real estate, precious metals or bonds. Too many people have invested all their money in stocks, when they don't have $500 for an emergency.
    But the nice thing is, once you do have a good picture of your expenses and income, as well as a reasonable budget you can stick to, you will find added funds that you can then use to make yourself more resilient and better placed to survive the coming storm.

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  • Sat, Nov 24, 2018 - 6:21pm

    dtrammel

    Status: Silver Member

    Joined: May 03 2011

    Posts: 807

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    Forgot One Good Budget Trick

    I forgot one good example of ways to budget and prepare.
    I own a washer and dryer. Its in the basement and like for most people its a very necessary piece of household equipment. During a cold and snowy St Louis Winter, the last thing you want to be doing is running out to the laundromat. I bought both of them used. A few weeks back the dryer started acting up. Sometimes it would come on, others times not. Seems to be if it runs too long, it doesn't want to work. Leave it along for a day and then if works.
    I will eventually need to repair it if I can or replace it, which is going to be a major expense. Dryers aren't cheap, either to repair or replace. Thing is that when I first bought them I put a five pound coffee tin, on a shelf next to the dryer. Each time I run a load of wash, I toss a dollar into that tin. Just like I had to do when I didn't have them and had to go to the laundromat. Don't know how much change is in it, but its almost to the top. I expect that it will easily pay for any repairs (the dryer is a Maytag) or be a hefty chuck of the money to replace it..
    Learn to break any future expense down into tiny micro payments tied to when you use the equipment. The $2-3 a week will quickly add up. You can do the same with my earlier example of car tires. Put a couple of dollars away each fill-up. Put a dollar a day away when you use your computer.
    I have a standard size notebook, with a bunch of those clear pencil pouches from school. Each one has a specific dedicated item that I add money to for when I need to replace them.
    That's a valuable habit to get into which can add to your resilience and prep.

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  • Fri, Dec 14, 2018 - 7:57am

    #14

    lambertad

    Status: Silver Member

    Joined: Aug 31 2013

    Posts: 242

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    Bigger pockets and REIA

    After listening to the last podcast with the real estate guys, I started looking around at websites for more specific information on RE investing. Bigger pockets is a decent website, it has articles on valuing properties, but it seems a lot of the information is contained in the forums (re specific strategies/locations to invest in). At least from my assessment. I also started attending some Real Estate Investors Association meetings in my local area. Several of the people who attend this local meeting are thoroughly seasoned professionals (3,000+) real estate deals during their career and others are just getting started (like me). Every month there is a meeting and often they will have speakers come talk about different aspects of RE investing. We had a guy who makes his money in real estate come talk about how to find deals (local courthouse, mailing post cards with offers, cold calling, knocking on doors, scouting neighborhoods for vacant properties, skip tracing vacant owners, websites where you can purchase lists of high equity homeowners in your area who may stand to make some cash from selling, etc.). There really is a vast knowledge base out there to be tapped, but I don't expect to find everything on PP. Some of it takes some digging, and from my first few months of looking at getting into RE, the REIA seems like the best source of information, at least for my local area. 
     

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