When the economy is unpredictable and tumultuous, a few things happen…
The stock market (and retirement accounts) can have drastic fluctuations, often wiping out years of gains overnight.
People’s ‘risk meters’ go into overdrive – keeping them in jobs they don’t like, scaring them away from continued investing. Unfortunately, in this current environment, because inflation is high, the future value of their savings is being chiseled away.
Navigating the complexities of a challenging economy without a crystal ball is tough – and knowing where to focus your investments to keep earning returns can be difficult.
Here’s something to consider. The best types of investments to focus on when the economy is unpredictable have 2 primary features: lower risk and income-producing.
Top features for investment opportunities in an unpredictable economy
Oftentimes, inexperienced investors view stock market investing as “low risk.” After all, if millions of other investors are doing this, it has to be safe, right? The truth is, the stock market has inherent volatility that many investors don’t consider.
And volatility kills the power of compounding. That’s why, when the economy is not stable, you want to focus on investment vehicles that are stable and carry lower risk.
How do you find lower-risk investments?
Finding investments that are lower-risk may seem daunting. Of course, you need to do your own research and due diligence, but here are a few steps to consider that can help you identify opportunities that are less risky:
- Look for inflation-protected investments. In our current economic environment, high inflation is a key factor in the instability. And when inflation is high, it can have a big impact on your cash. Let’s say your money is tied up in a 5-year investment that doesn’t adjust for inflation, like bonds. By the end of that period, you may have “technically” made money on your investment, but the value of the dollar has decreased – and your debt terms didn’t adjust with inflation. So in reality, you made much less. Looking for inflation-protected investments, or investment vehicles that naturally adjust to inflation, can mitigate a lot of risk and protect your capital. One of the best inflation-protected vehicles is real estate. Mortgage rates, property prices, and rent historically track (and beat) inflation. Other asset classes that can be a hedge of protection against inflation because they aren’t as sensitive to public equity markets are commodities like oil and gas.
- Look for investments backed by actual assets. Investments whose value is (at least partially) based on a physical asset are almost always going to be less risky than investments where this isn’t the case. Venture capital, for example, is a riskier investment because you’re betting on the future success of a business. Owning a share of a valuable piece of artwork, on the other hand, gives you the collateral of the actual piece of art. Maybe its value changes, but it most likely won’t go to zero. Common investment vehicles that are backed by assets include art, collectibles, and – most notably – real estate. Real estate can include everything from multifamily syndications to industrial properties to mortgage note investing.
- Look for a track record. Aside from the actual investment opportunity itself, it’s also paramount to evaluate the risk associated with the operator of the investment. When the economy is unpredictable and you’re looking to lower risk, it’s especially important to invest with operators that have a solid track record. Key things to look for in a track record include length of time in operation, total assets under management, whether any return payments have been missed or delayed, past capital losses and historic performance during challenging economic environments, like during Covid. While past performance doesn’t guarantee future performance, positive indicators in all these areas can help mitigate some risk.
Want to learn how you can earn 9% passively? Learn about our Income Fund.
Finding investments that produce regular returns in the form of monthly or quarterly checks are always top of mind for investors. But this becomes especially important in periods of economic uncertainty.
Income-producing investments can help supplement earned income or provide a financial buffer if you hit any road bumps during an economic downturn.
Types of income-producing investment assets
- Real estate. One of the easiest places to find investments that will generate regular income is real estate. There are crowd-favorite options like syndications in multifamily, commercial, and retail properties. There are also lesser-known real estate investments like mortgage note investing.
- Oil & Gas. Investing directly into existing oil fields can produce strong yields. While these types of investments can have more volatility given the ties to commodity prices, generally the risk-adjusted returns can be compelling. And similar to real estate syndications, these types of investments can be available to accredited investors.
Other less-common alternative investments that can produce income are things like investing in farmland that generates dividends or buying catalogs of music that produce royalties.
- Dividend stocks. Dividend stocks pay investors dividends usually on a quarterly basis, based on company earnings. The dividend amount varies and is determined by the company’s board of directors each quarter.
- Bonds. Bonds are essentially loans to the government at a fixed-interest rate. You receive payments at this fixed amount on a fixed schedule according to the loan terms.
- REITs. Real estate investment trusts are publicly traded shares in a company that owns physical real estate (like office buildings), collects rent from tenants, and distributes the majority of its earnings as dividends.
Investment Opportunities with Aspen Funds
One of the first funds we created at Aspen is our Income Fund, which was designed to provide 9% current income for investors. That fund has been operating for 9 years, and we have never missed a preferred return payment. To learn more about the fund, register to watch the webinar.
Ben Fraser is the Managing Director and Chief Investment Office of Aspen Funds. Prior to Aspen, Mr. Fraser was a commercial lender at First Business Bank specializing in government backed loan originations (SBA & USDA), for one of the top SBA lenders in the nation. Prior to that he was a commercial credit underwriter for Crossfirst Bank, personally responsible for underwriting over $125MM in C&I and CRE loans across a variety of industries.