Investment for a declining economy (recession proof)

[Mrtreasuretoupee]

A thread in the welcome forum named "Thoughts on FIRE in a declining nation" got me thinking about investments that may be more recession proof than others or better for a generally declining economy. I do feel that other countries with higher education standards will prosper more than the USA will.  Without getting too much into the political reasons for this I might also see that the world has had too much time evolving into a global economy for the current administrations attitude of "America First" especially since there are so many goods that aren't even made in America anymore.  So I stumbled upon some REITs that might be a good deal even if the economy declines. Particularly a company like SNH Senior Housing Properties Trust. http://www.snhreit.com/home/default.aspx   My method of thinking is that so much of their money comes from people who have saved their money through the "incline" and are now living off of their savings. There is a 8%+ yield that I think is long term sustainable. Do any of you guys have any investments that they think are safe from economy problems?

[marty998]

Hesitant to say investing in funeral companies. There is one listed in Australia (Invocare).

For the foreseeable future I can't see that there will be a shortage of customers, however, there is the off chance in the future that science will extend human life expectancy significantly.

[Interest Compound]

A thread in the welcome forum named "Thoughts on FIRE in a declining nation" got me thinking about investments that may be more recession proof than others or better for a generally declining economy. I do feel that other countries with higher education standards will prosper more than the USA will.  Without getting too much into the political reasons for this I might also see that the world has had too much time evolving into a global economy for the current administrations attitude of "America First" especially since there are so many goods that aren't even made in America anymore.  So I stumbled upon some REITs that might be a good deal even if the economy declines. Particularly a company like SNH Senior Housing Properties Trust. http://www.snhreit.com/home/default.aspx   My method of thinking is that so much of their money comes from people who have saved their money through the "incline" and are now living off of their savings. There is a 8%+ yield that I think is long term sustainable. Do any of you guys have any investments that they think are safe from economy problems?

The market knows about SNH. The market knows the stock is currently yielding 8-9%. If other investors also believed this is a low-risk recession proof stock, they would take advantage by buying it! In fact, they'd keep buying the stock until the yield dropped to a point where they no longer considered it a good deal, maybe 2-3%.

So the question is, why don't other investors, people with significantly more money (billions of $), resources (multi-billion $ corporations behind them, with super computers), time (they're working on this 80 hours a week, it's literally all they do), and experience...why don't they agree with you?

Why is no one else taking advantage of this FREE MONEY opportunity? Why is the stock currently yielding 8-9% instead of 3-4%? Do you think you know more, or can otherwise make better decisions than everyone else out there? To the point where you can have a non-related full-time job, come home, read a few pages of text on the internet while relaxing after work, and literally take money from people who are (frankly) much smarter than you?

Please, don't take this as a personal attack. These are the questions everyone should ask themselves before they consider making a move like this. Especially when during our last declining economy, SNH fared much worse than the rest of the market:

[Financial.Velociraptor]

Hesitant to say investing in funeral companies. There is one listed in Australia (Invocare).

For the foreseeable future I can't see that there will be a shortage of customers, however, there is the off chance in the future that science will extend human life expectancy significantly.

I used to work for SCI and have friends who have worked for Carriage (spinoff).  Houston is ground zero for the global cemetery/funeral home roll up business.  It's a shitty business.  Or at least it is now that it is burdened with heavy acquisition related debt.  There were also...accounting irregularities...  The revenue will always come through but the operational efficiency is low and capital requirements are high while regulation in crippling.

I think good old Consumer Staples (good ETFs in this space), productive farmland (ADM?), and timber land (plenty of REITs in this space) are all pretty defensive.   

[MrSpendy]

SNH trades at a discount because it is externally managed by the RMR Group, a real estate concern which has generally, over time, prioritized funneling money to the Portnoy family by growing AUM at the expense of long term shareholder returns.

You can read more about them and their empire by googling "Corvex commonwealth REIT" "RMR Group" "Lakewood Select Income REIT" etc. that should give you a flavor for how hedge funds and other market participants feel about how the portnoys run their companies.

I have made money buying their REITs in the past when the discount appeared to price in a lot of the poorly aligned management, but I would not recommend n investment in shares managed by them without knowing what you are getting into. Picking a stock by dividend yield alone is generally a good way to taken advantage of by more knowledgable market participants or management teams. Have also made money owning the management company (RMR group, which is the parasite that sucks the fees from all the other entitities.

In short, caveat emptor.

Putting concerns about management alignment aside, the supply / demand situation for senior housing will drive the economics of SNH more so than what the economy is doing; that doesn't mean it will do well or not do well in a declining economy. It just means it has a cycle to it. I don't have a well formed opinion on where we are in that cycle.

As for investments for a declining economy, the textbook answer would be long term government bonds. but it all depends on the exact nature of the downturn. A deflationary depression would favor long term treasuries. High inflation wih little growth may favor gold, or high quality companies able to pass on price increases. It's a hard question to answer.

[theolympians]

While you don't want to get into the "political" aspects involved in your potential decision, I think it would be good to point out that the political is guiding your thoughts. As others have said in different ways, don't expect the REIT to maintain its altitude or climb in the event of a recession.

Just look the companies track record and potential to decide.

[theolympians]

company's not "companies"......

[doggyfizzle]

Hard to beat KO as an all-weather investment.  The Permanent Portfolio mutual fund advertises itself as a fund for all markets (and uses an asset allocation based upon Harry Browne'd work from the 70s).  I don't own any of that m-fund myself, but i do find the allocation interesting.

[SeattleCPA]

A couple of comments...

First, though I don't have the, er, personality or temperament to use Harry Browne's asset allocation formula, reliable people who think a lot about this stuff say it works. Bill Bernstein, for example:

http://www.efficientfrontier.com/ef/0adhoc/harry.htm

Second, David Swensen's "Pioneering Portfolio Management" book provides quite a bit of advice about how to handle bear markets... I tried to summarize some of this stuff at my blog a couple of weeks ago:

http://evergreensmallbusiness.com/bear-market-survival-tactics/

A generalization: I propose the way to defend your portfolio against the risks etc of a declining economy is via asset allocation...

[ysette9]

This whole thread reads like advice on market timing wrapped up in some fancy paper and a big bow. The best defensive portfolio is the best offensive portfolio is the same portfolio that will meet your needs and allow you to sleep well at night when the markets are doing nothing exciting. Write your Investment Policy Statement to align with your risk tolerance and goals and keep the specific market performance at this moment in time out of it. Once that is done, use the time you would otherwise be wringing your hands to go outside and play. :)

[aschmidt2930]

A thread in the welcome forum named "Thoughts on FIRE in a declining nation" got me thinking about investments that may be more recession proof than others or better for a generally declining economy. I do feel that other countries with higher education standards will prosper more than the USA will.  Without getting too much into the political reasons for this I might also see that the world has had too much time evolving into a global economy for the current administrations attitude of "America First" especially since there are so many goods that aren't even made in America anymore.  So I stumbled upon some REITs that might be a good deal even if the economy declines. Particularly a company like SNH Senior Housing Properties Trust. http://www.snhreit.com/home/default.aspx   My method of thinking is that so much of their money comes from people who have saved their money through the "incline" and are now living off of their savings. There is a 8%+ yield that I think is long term sustainable. Do any of you guys have any investments that they think are safe from economy problems?

If you're interested in that market, look into Welltower (HCN).

I'm certainly NOT an expert.  But from what I do know, Welltower has a phenomenal long-term history, has better management than SNH, and has a consistent track record of dividend growth.  Dividend growth is frequently overlooked.  Share prices tend to appreciate with rising dividend payouts, keeping the current yield consistent, but increasing the yield for those who invested in the past.  In the ideal state, of course.

Stock picking is risky in all forms, but if you're going to do it, HCN isn't a bad route to go IMO.  The market *should* see a long-term demand increase, has yet to undergo REIT consolidation, and HCN is the best in the business.

[Interest Compound]

This whole thread reads like advice on market timing wrapped up in some fancy paper and a big bow.

Exactly. This thread needs to come with a big WARNING sign for any lurkers thinking they're walked into a thread with some great investment advice...

You haven't.

Even Harry Browne and his Permanent Portfolio failed miserably at this test. What chance do you think you have? Do you think you're better than Harry Browne? (Have you even heard of Harry Browne?)

Just stick to the standard advice...and slowly back away from this thread. Volatility is only temporary, but you can permanently cripple your portfolio trying to avoid it.

[Proud Foot]

Do any of you guys have any investments that they think are safe from economy problems?

Nothing is really safe from economy problems.  If you are wanting to help protect your investment during a recession without lagging too far behind in a bull market I would look at a consumer staples index (VCSAX, VDC - ETF).  Since inception in January 2004 it has a CAGR of 10.21% while VTSAX has had a CAGR of 8.14% over the same time period.  The difference primarily came from the recession in 2008-2009 where the consumer staples index did not fall as much as VTSAX.

[SeattleCPA]

This whole thread reads like advice on market timing wrapped up in some fancy paper and a big bow.

Exactly. This thread needs to come with a big WARNING sign for any lurkers thinking they're walked into a thread with some great investment advice...

You haven't.

Even Harry Browne and his Permanent Portfolio failed miserably at this test. What chance do you think you have? Do you think you're better than Harry Browne? (Have you even heard of Harry Browne?)

Just stick to the standard advice...and slowly back away from this thread. Volatility is only temporary, but you can permanently cripple your portfolio trying to avoid it.

I actually thought the advice I shared via the blog link for people worried about investing in this market was pretty good...

Specifically, these points gleaned from Swensen...

1. Use a common sense asset allocation because that's a way to dial down your portfolio risk to a level you can live with
2. Assuming you've got a common sense asset allocation, rebalance to avoid drifting into a riskier allocation
3. Simulate the future to test how you really feel about the risk embedded in your portfolio
4. Avoid panicking when the market sinks because that's the way to amplify the damage
5. Vary your withdrawal rate if you're already retiring because that'll dial down your risks of failure

Regarding Harry Browne, I am not a proponent as I said. But are you sure the portfolio fails? If someone has the stomach--I don't--both theory and the data say it works as per what I've seen. (E.g., the post to Bernstein.)

For the record, I've been using and recommending a passive investment strategy for decades and use the asset allocation Swensen outlines in "Unconventional Success"