Investing Cash in January 2018

I know a fellow who had two homes. He sold one of them to raise some cash. He’s now looking for a better house for him and his wife to move into. When he finds it, he will buy it, and sell the other house. He says he’s investing the pile of cash in bonds. Indeed, short term bonds or cash is the place to put a few tens or hundreds of thousands of dollars if you expect you will want to make a down payment on a house with it during the next two or three years. You will miss some of the higher yields available in stocks, but if the stock market crashes, short term bonds will retain nearly all of their value or maybe even increase in value a little, and you will still have your down payment.

S&P 500 Jan 18, 2007 to Jan 18, 2018

If you are buying bonds, remember that as interest rates rise, the value of a bond (especially a long term bond) will go down. These phenomena resemble two sides of the same coin. They are literally inseparable. So, if you’re stashing your cash in bonds, buy short term bonds, like VTIP Vanguard Short-Term Inflation-Protected Securities ETF, with 2.5 years average duration.

VTIP Vanguard Short-Term Inflation-Protected Securities

But if you have a longer time horizon, you might seek a suitable investment in real estate, on the theory that it might not crash so much if the stock market crashes, and might even go up. Now, that’s not a recommendation exactly, but a hypothesis. If you take that view and base your thoughtful speculation on it, then you have some good choices.

I'm currently aware of two ETFs of good quality invested in REIT indexes of many REITs so that they more nearly approximate the wisdom of a real estate index than the brilliant ideas of 3 or 4 analysts running an actively managed fund that the market can easily outperform. These have a good combination of book value to price, low expense ratio, high & consistent rate of dividend growth.

VNQI Vanguard ex-US Real Estate

SCHH Schwab US Real Estate

Some brokerages might well have their own indexed fund of REITs, probably with the promise of commission-free trades for their own products. However, with the commission on a trade being $5 (at Fidelity and Schwab, for example) for even fairly large (non-institutional) trades, the value of "commission-free" is among the most trivial things. Indeed $5 is overwhelmed by the expense ratio and the dividends paid and the price movements in the market. So, "commission-free" shouldn't guide your choice of investment.

Individual stocks necessarily have a deeper potential downside than REIT ETFs. They also have a more spectacular potential upside. Some stocks I'm aware of that we can expect to move with the general value of real estate include the following three.

DLR Digital Realty Trust, REIT specialized in Data Centers.

DHI D. R. Horton, House builder.

HHC Howard Hughes Corp., Large-Property Development & Management

HHC is rather more speculative, in my opinion. While the company has made a profit in only the last two reported years, the level of profit has increased monotonically during each of the last 4 reported years, suggesting they have learned to manage making profits consistently and at increasing levels.

DLR and DHI survived the last market crash. HHC didn't exist at that time. The S&P 500 peaked on Oct 9, 2007, then declined to bottom on Mar 9, 2009. I find it interesting to look at the change in price between these dates afterward to Mar 9, 2010.  DLR lost 32% of value, and DHI lost 47% of value from market peak to bottom, so that both performed better than the median stock during the decline. In the recovery from bottom to a year later, DLR increased by 97%, slightly above the median of 81% for stocks, & DHI by 70%. Overall, from peak in 2007 to the 2010 anniversary of the bottom, DLR increased in price by 34%, and DHI decreased by 9%. During the last 10 years, DLR increased in price by 200%, and DHI by 290%, both above average for stocks, and both have increased in price in 8 of the last 10 years, rather more consistently than all but 3% of stocks.

Regarding the resilience during the crash of 2007-9 and aftermath, there are two stocks that performed well during this period which I regard as good long term investments.

EBIX Ebix, insurance exchange software, increased 15% from Oct 9, 2007 to Mar 9, 2009 & 154% from Mar 9, 2009 to Mar 9, 2010.

PCLN Priceline, travel services, decreased 14% from Oct 9, 2007 to Mar 9, 2009 & 204% from Mar 9, 2009 to Mar 9, 2010.

All that said, There's nothing too foolish about buying the S&P 500 and never selling it. Crash or no crash, just hold on to it. Warren Buffett recommended that specific strategy for his heirs and further specifically the Vanguard S&P 500 fund (VOO on NYSE).

VOO Vanguard S&P 500 fund.

See page 20 of his 2013 letter to shareholders 2013 letter to shareholders, or the short version in the news article from Mar 13, 2004 MarketWatch. The shares of Mr. Buffett's company Berkshire Hathaway sell for about $210 (BRK.B on NYSE). I regard BRK.B as a better long-term investment than 2/3 of stocks, provided you put just a small fraction of your life’s savings in it. In case of a crash, just hold on to it.

Disclosure: I own shares of SCHH, VNQI, VOO, EBIX, PCLN, and BRK.B.

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