Tuesday, August 18, 2015

The Deadliest Investment Myths. Real Estate Best or Worst? Etc.

By Harry S. Dent Jr., Senior Editor, Economy & Markets

EditorThe S&P 500 is struggling to even remain in positive territory this year. It’s on its last legs.

Then in some of the bubbliest cities, magnificent homes are still being built. Homebuyers and investors don’t seem to realize we’ve reached a peak!

Like I’ve said many times before, most investors pile into the markets with everyone else. They don’t get in closer to a market bottom like they should.

Worse, the last few get in after other investors have already picked up the gains. They have a huge misperception of risk. They think, the longer a market has gone up, the less risk there is. But the truth is that the longer and stronger a market’s advance, the more likely it is to go down – and to go down big time!

Think back to the tech bull market from October 1990 to March 2000. It resulted in one of the biggest bubble bursts of all time, with the Nasdaq falling 78%.

The most astute investors (AKA the “smart money”) buy at these times when the markets are down. Meanwhile, most investors shun them out of fear. Big mistake!

In reverse order, the smart money gets out at a market top when the last few investors decide now seems like a good time to pile in. That’s why, when it comes to making investments most Americans think you should, you should actually do the opposite!

This all follows a natural S-Curve pattern. The 0.1% get in first. Then the 1%. Then the 10%. That’s why these people so dominate wealth and income. They’re willing to take more risk. So they pick up the most gains!

Most investors get in somewhere in that 10% to 90% acceleration. Not at the beginning. Hence, what they think and do are not good indicators of the best future trends.

To give you some insight into what most Americans consider the best long-term investments, here’s a recent poll from Gallup, the premier surveyors of American attitudes:

Real estate is currently No. 1 at 31%. Except it’s the worst long-term investment by our research!

We’ve built way too many houses, and just don’t have enough people to fill them into the future. Since the Boomers are a larger generation than Generation X which followed, as they retire, downsize, and eventually die, real estate will fall with them. And I doubt it’ll ever reach these heights again.

Just look at Japan. It’s already proven that real estate can go down 60%, and not recover even 24 years after its peak.

Now, I don’t think real estate will drop as much as stocks in the crisis ahead. But the difference here is that most people have mortgages on their real estate, so the falls are more painful! The majority of homeowners who signed a 30-year mortgage today, or even 10 years ago, should not hope to see their investments appreciate. Period.

No. 2 on Gallup’s list are stocks, at 25%.

As I’ve already explained, most investors get into stocks well after they should have, and are too late getting out. Investors have been swooning over stocks as they’ve reached all-time highs… but that just means they have further to fall!

When this BS, artificially Fed-generated recovery finally fails, those investors will be sorry.

If I had to choose, I’d rather buy stocks than real estate right now, as stocks will actually recover after a major crash, even substantially. I can’t say the same for real estate.

Now on to No. 3. Everyone’s favorite metal – gold!

King Gold was at its peak in 2011 at 34% in the poll. Since then, it’s dropped to 19%. Still, it’s beating savings accounts and bonds… which in my mind are clearly superior.

Gold does have some redemption in times of crisis as I explained in Boom & Bust back in May. That could cause it to have a small bump when the next meltdown first hits. But ultimately gold has further to fall, to $750 initially then as far as $250.

That brings us to the last two: savings accounts and bonds.

Though only 15% of Americans name savings accounts as the best long-term investment, that is where investors should be in this unprecedented bubble, at least to a large extent.

Today, investing in a savings account would allow you to preserve your gains, sleep well at night, and have instant liquidity to buy when everything crashes ahead. But for some reason, no one wants cash today!

Although right now instead of savings I’d actually recommend you put your cash in safe short-term bonds – or a money market account in your brokerage account. That’s because banks can lend against a savings or checking account. As things crash ahead and too many loans go bad, banks may simply not have your money when you want it – as happened in the Great Depression!

Bonds come last in the poll at just 6%, and for most people that means safe Treasury or high quality corporate bonds. [These assets compose the majority of whole life insurance cash value.]

Such bonds were the single best investment by far from late 1929 to 1941 — they nearly doubled in value, as stocks and most investments were crucified. These same bonds could be very valuable moving forward through this economic winter season.

To summarize, investors have it totally upside down when it comes to the best long-term investments. It should be: high quality bonds [e.g., whole life insurance], savings (or money market accounts), gold, stocks, then real estate. Not the other way around.

Don’t follow the collective opinion of the majority of Americans. We tend to think there’s strength in numbers, and we’re biased to follow the crowd. But that doesn’t mean the majority gets it right. And in this case, the majority’s dead wrong...."

Harry Dent

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