Even if you are not an investor, the election of Donald Trump as the upcoming PoTUS shocked everyone back in November. 99% of predictions from all major media & experts were wrong. Stocks went tumbling down the moment he emerged as the winner. Then he gave his victory speech – and, again, nobody predicted he gave a conciliatory one instead of his usual egoistic tone to bash Clinton’s defeat.
The market bounced after that and subsequently reached a new high. US Dollar also strengthened.
Politics… cannot be predicted because it is chaotic. So many factors are at work and their interactions are so complex that extremely small variations in the strength of the factors and the way they interact produce huge differences in outcomes.
Stocks market fluctuation, just like political change, is what we call a “level 2” chaotic event.
Let me explain.
Level 1 Chaos
Chaos that does not react to predictions about it. The weather, for example is a level 1 chaotic event. Though it is influenced by a myriad of factors, we can build computer models that take more and more of them into consideration. As a result, we produce more accurate weather forecasts.
Level 2 Chaos
Chaos that reacts to predictions about it, and therefore can never be predicted accurately. Again, I want to reiterate here that market volatility, is a level 2 chaotic event. Level 2 chaos results in a self-defeating prophecy.
What will happen if we develop an app that accurately predicts the price of a stocks, tomorrow?
Assume Apple price today is $ 100, and the infallible app predicts that tomorrow it will rise to $ 120. Investors will rush to buy it immediately, today so that they can profit from the predicted price rise.
As a result, the Apple share price will shoot up to $ 120 today rather than tomorrow.
Then what will happen tomorrow?
This is called, a self-defeating prophecy. Events don’t come true because it was predicted.
It’s possible to accurately predict level 1 chaotic event with more sophisticated computer models to produce better weather forecasts, because the weather doesn’t react to our predictions of it.
But it’s basically impossible to accurately predict level 2 chaotic event because these systems will re-write themselves based on what is known about them. This is especially applicable to most systems involving humans.
For many, although they liked the liquidity of investing in stocks, they fear the fluctuating prices. This makes investing your money in 2017 a challenging feat. Prudent investors know that stocks predictions are futile.. So, they will diversify into real estate property investment when sensible opportunities present itself.
It is a rational decision which can be explained using the 2 levels of chaos and their impact to real estate property price.
Level 1 chaotic events usually have major positive impact towards real estate property prices. For example:
- The next real estate property hot spots
- Inflation causes real estate property price to increase
- Rental income appreciation
These are not questions whether the events will occur (or not). These are only questions of
Level 2 chaotic events usually have minor negative impact towards real estate property prices. For example:
- The slump of oil & gas sector
- Crude oil Brent price
- Outcome of an election
However, most people find the illiquid nature of real estate property investment a turn-off, until they come across REIT estate investment trusts (REITs).
There is one asset class which has beaten all other asset class(es) for the past 15 years consistently.
It has weathered the Dot Com crash in the early 2000, the 2008 financial crisis, the US Black Monday in 2011 & the China Stock Market crash in 2015.
In other words, it withstand the best against market volatility and ambiguity over long periods. This is the strategy we want to employ in 2017 when it comes to investing.
Look at the chart below.
The only other asset class which can match REIT asset class performance is Large Cap stocks (orange color cells).
Are we out of the woods yet?
By now you know most Asian and other Emerging Market (EM) currencies are getting weaker because foreign investors are taking invested money out, repatriating them back to US.
But this probably will not last long.
Here’s what most people don’t understand.
Trump’s “Make America Great again” policy means he will need a lot of debt to finance his fiscal plans. Remember this – China is the largest non-US holder totaling $ 1.5 trillion Treasury Bills/notes/bonds.
Does it make sense to slap a 45% tax on all imports from China, aka, bite the hands that feed you?
Furthermore, if he managed to push through tax laws that imposes 1-time flat rate of 10% tax on corporate profits repatriated to US, these company monies will need to be sold in exchange for US Dollar, which will further strengthen USD.
All these look like a good thing for US economy, but wait..
An overly strong USD could undermine US growth in the long term.
Once people see that a super-strong USD is not good for trade (read – US goods are too expensive too buy due to strong USD), we will all stop buying US goods.
This is further worsened with Trump’s pro-growth policy to bring manufacturing back jobs to US – jobs which have been outsourced outside US for long due to cost-savings.
This is a fact – business costs in US are already all-time high due to high hourly wage for US workers – can you imagine your iPhone 8 retail price will now DOUBLE?
When the market realizes this, the USD could unravel very quickly because demands for its goods are falling. The next impact is US may go into recession but before that happens, the Federal Reserve will do what it can to prevent it. Example – to NOT raise interest rate anymore in 2017.
Now, with understanding of this – how to you actually invest your money in 2017 with all ambiguous and uncertain market landscape?
The thing is, while all of these make sense to me and to you, there is no guarantee it will happen.
I don’t know about you but here’s what I believe: Simplicity is the ultimate sophistication when it comes to investing in 2017.
And that is why REIT is still my asset class of choice for now.
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