My portfolio strategy for 2022

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Despite recent concerns about rising interest rates, the reality is that we remain in an ultra-low-yield world, and even after several potential hikes in 2023, real interest rates will still remain negative.

Inflation is 6.8%, but the 10-year Treasury bonds (EIF) yield only 1.5% and long-term corporate bonds (VCLT) do barely better at 3%. The gap is huge and real rates of return are clearly negative.

Chart
Data by YCharts

If you thought it was bad, look at what is happening in Europe. There, even nominal interest rates are negative. A bank has just informed me that they will start charging me 0.4% per year to hold euros in the future.

So it’s no surprise that everyone has turned to equities for better returns. The problem here is that because everyone had the same idea at the same time, valuations have now reached extraordinarily high levels, with the S&P 500 (SPY) trading at around 30 times earnings, double its historical average. .

At a time…

  • We have a raging pandemic and restrictions
  • Global supply chain issues
  • The threat of a world war if Russia attacks Ukraine
  • The threat of a world war if China attacks Taiwan
  • Highest inflation in over 30 years
  • Countries and companies are more indebted than ever
  • The risk of higher taxes
  • And I pass over many other imminent risks.

… Surely it can’t end well?

If that’s what you’re wondering, then you’re not alone.

Where can you invest today to not only grow your wealth, but also protect it from these risks?

Many have turned to cryptocurrencies like Bitcoin (BTC-USD) and Ethereum (ETH-USD).

Some favor real assets or real asset heavy investments like REITs (VNQ) and MLPs (AMLP).

Others have turned to assets like fine art and farmland through crowdfunding platforms like Masterworks and FarmTogether.

And then eventually some took it a step further and started investing in even more exotic assets like digital real estate in the Metaverse or digital art via NFTs.

There is no right or wrong approach here. We all have different return goals, risk tolerances and other personal circumstances that determine our preference for one asset or another.

But there is one thing to remember:

These alternative asset classes are rapidly gaining popularity, and if you haven’t considered them yet, you’re missing out on opportunities to increase your portfolio’s future returns and reduce its risk through diversification.

The alternatives, in my opinion, can be anything other than traditional stocks or bonds. I would include things like crypto, NFTs, crowdfunding, and real assets, whether private or publicly traded through REITs or MLPs.

The market for these alternative asset classes is actually much larger than the market for traditional financial assets, and private equity giant Brookfield (BAM) expects alternatives to make up more than 60% of its portfolio. an investor by 2030:

Source: Brookfield (BAM)

The reality is that portfolio allocations have already evolved significantly over the past few decades. Not so long ago, most of us invested up to 40% of our portfolio in bonds, and the alternatives were mostly ignored. Today, bonds have been replaced by stocks, and now stocks and bonds are gradually being replaced and/or supplemented by alternatives because they offer:

  • Higher return potential in an expensive market
  • Higher yield in a yieldless world
  • Inflation protection in a money-printing world
  • Benefits of diversification in a volatile market

This shift in portfolio allocations has massive implications for investors, as it means tens of trillions of capital could shift to alternative asset classes over the next decade.

Since the supply of these alternative assets is limited (think farmland), but their demand is growing rapidly, you don’t have to be a rocket scientist to figure out that their prices are likely to rise.

I believe this is a historic opportunity for investors and I have structured my portfolio to capitalize on the growing popularity of alternative assets.

For once, we have the opportunity to invest before the major institutional investors who are subject to many constraints that slow them down in their adoption of alternatives. Most institutional investors are constrained by their investment mandates and these take time to evolve, giving us a window of opportunity to invest ahead of them while valuations are still relatively attractive. The growing adoption of Bitcoin is a good example of how growing demand coupled with limited supply can impact prices:

Chart
Data by YCharts

But to be clear, I’m not a big fan of crypto myself.

We all have a unique approach to investing in alternatives.

Personally, I mainly invest in defensive, income-generating real estate assets that are essential to our society. Good examples of this include:

Affordable Apartment Communities:

Appartement mi-américain : un SWAN anti-pandémie différencié par sa conception <span class=

Source: Mid-America Apartment (MAA)

Service-oriented net lease properties, such as Taco Bell restaurants:

VICI properties

Source: National Commercial Properties (NNN)

Wind mill:

Source: Brookfield Renewable (BEP)

Agricultural and wooded land:

Cat Canyon Road

Source: Gladstone Land (EARTH)

A passenger port terminal:

Source: Tallinna Sadam (TSMT)

I like these alternative investments because in a world of high stock market valuations, ultra-low bond yields and unprecedented uncertainty, I expect them to offer higher returns with lower risk over time. time.

Many of these assets still offer a defensive return of more than 5% and a predictable trajectory to annual growth of more than 5%, which combined should lead to a total return of more than 10%, without even taking into account the advantages of multiple expansion. If you think these assets will continue to grow in popularity, it’s not a stretch to expect another 5-10% from rising valuations, bringing total returns to 15-20% per year.

Ultimately, I don’t know of any other asset class that offers a better risk-reward ratio and that’s why I invest more than half of my portfolio in these real assets:

Here you may be wondering: how can you invest in such assets?

Well, fortunately, it is now easier than ever to invest in alternatives.

There are well-established and reputable platforms for assets like crypto. I am thinking of Coinbase (COIN) for example.

There are also rapidly growing crowdfunding platforms for real assets.

And finally, many REITs, MLPs and other infrastructure companies are publicly traded. I get most of my exposure through them because they give me exposure to alternative/real assets with the added benefit of leverage, diversification, professional management and liquidity.

Hard to beat that!

Moreover, because they benefit from significant economies of scale and have better access to capital at lower cost, they have historically generated higher returns than other private investors:

Source

What examples am I buying?

In total, I own about 30 real assets/alternative investments, representing over 50% of my total portfolio.

Here are some examples I’ve invested in recently:

  • Northwest Health Properties (OTC:NWHUF) is a Canadian REIT specializing in investments in hospitals and medical office properties. It pays a monthly dividend yield of 6% and we estimate it has an annual growth potential of around 5-7%. Combined, they should provide consistent double-digit annual total returns.
  • REP properties (EPR) is an American REIT specializing in net-lease experiential properties such as movie theaters, water parks, golf resorts and ski resorts. Currently, it is heavily discounted due to the pandemic, but as we move past it, we expect its valuation multiple to recover, unlocking 30-50% upside for shareholders. While you wait, you earn a monthly dividend yield of 6.5%.
  • Tallinna Sadam (TSM1T) is an Estonian REIT entity that owns the port of Tallinn and all the valuable land around it. The city of Tallinn is growing rapidly today and we expect the company to sell its land within the next 24 months, unlocking significant hidden value for shareholders. We expect at least 30% upside, but most likely much more, and while you wait, you earn a dividend yield of almost 5%.

By owning about 30 of these investments, I am able to achieve above-market returns while diversifying risk. My portfolio’s average cash flow yield is just over 8%, of which 5% is paid out in dividends, and the remaining cash flow is reinvested in growth.

My real asset portfolio has generated average annual returns of 20% since inception, and as these alternative investments continue to grow in popularity, I expect these strong returns to continue into 2022 and beyond. :

Source: interactive brokers

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Don F. Davis