The Doomsday Investment: Real Assets

Every time I turn on the news the media has found another “doomsday” story to scare the masses into thinking that the world is going to end. Y2K, Avian Flu, SARS, Swine Flu, terrorist attacks, drug wars, and multiple financial crises have been the most prominent topics of the recently ended decade. While all of these are formidable problems in the world (except maybe Y2K), I think most of us can agree that the media blows these way out of proportion. The next big event is supposedly the winter solstice in 2012, when the Mayan Calendar ends and some speculate the world will end with it.

One theory about the latest doomsday is that many smaller events will culminate in the ultimate end of the world. Perhaps it’ll be a large scale natural disaster paired with the collapse of the financial markets. Any way you choose to imagine it, the New York Times has the solution for you:  no matter your fear, gold is the answer. While they don’t explicitly endorse gold as a good investment, they certainly don’t offer any counter advice.

While in a troubled market, a rush to real assets is generally considered good principle,  but I hesitate with gold. My main reason: gold is at or near record highs. And sure, maybe the sky’s the limit, but history has shown that when the rest of the economy comes back, gold will fall. Now there are plenty of reasons why this may not happen right away. One would be a euro-zone sovereign debt default. But even still, it would cause a temporary spike in the price of gold that should come back as the economy recovers.

While gold may potentially be a good short term trade, it’s hard to believe that it will sustain these prices. This brings me to my next point: this is not an investor’s market. It is a trader’s market through and through. The New York Times’ indirectly sunny outlook on gold could potentially lure someone into thinking this was a golden investment opportunity. Okay, so what else should you consider if you want a real asset that isn’t at record prices? Given that you’re already at this page, I think you know my answer: real estate.

A few reasons why real estate may be a better investment for you than gold: Real estate can provide regular income for you throughout your investment period through rental income. Real estate can also provide many tax benefits. One of these is depreciation, in which you treat your purchase as an asset that loses value as you use it, regardless of its market value. For most commercial properties depreciation can be carried out over 39 years. This depreciation can be used to offset capital gains, thus reducing your tax burden.

To play devil’s advocate a little, real estate could also be a problem investment. Rents are low, and occupancy rates aren’t the best either. Generating the income you need could be a problem. But at least real estate prices are low, and the price should increase as the market comes back. Whereas, buying gold at an all-time high begs the question, how much higher can it go? The cost of ownership needs to be taken into account as well. With real estate comes property taxes, but at least you don’t have to figure out how you’re going to store the gold you just bought.

The way to avoid these costs of ownership is to invest in an entity that invests in real estate or gold (ETFs, etc). You can see our previous article here for more detail, but in summary to expose your portfolio to real estate you can invest in a REIT such as Hersha Hospitality Trust (NYSE: HT), or an exchange traded fund that tracks real estate, such as ProShare Ultra Real Estate (NYSE: URE). For gold, you can buy the SPDR Gold Trust (NYSE: GLD). Or you could use the less liquid mutual fund route, an example being the Tocqueville Gold Fund (MUTF: TGLDX). But it should be noted, that because gold is at record highs, so are these funds.

Maybe gold has nowhere to go but up. Maybe there will be a slew of euro-zone defaults eventually resulting in a US default with some earthquakes, a few hurricanes, a plague or two and the world will end on December 21, 2012. In that case, none of this really matters. But at 12:01am on the 22nd, after you rejoice that you’re alive, I hope you think of me. I’ll be toasting to another doomsday survived, and hopefully sitting on a well-diversified portfolio fully exposed to real estate bought at low prices, and not gold bought at high prices.