It’s that time of the year again. The time for financial analysts — and market-watchers — to look forward and forecast what will happen in the coming year. For investors, one of the most important predictions is what will happen with the stock market. Here I share what the experts have to say. But I also ask you as an investor to think about “What are you going to do with this information?” and then I share my own thoughts on the subject.
In their just published 2017 US Equity Outlook Goldman, Sachs & Co. predicts by end of Q1'17 the Dow will hit 2400 (up 9%) on optimistic expectations for new pro-business legislation from the incoming administration. Then in 2H 2017 Goldman sees the Dow pulling back as inflation, reality, and fear set in — closing the year at 2300 just roughly 5% ahead of current levels. You can find a more detailed summary of the GS report here.
How do you feel about that? What are your thoughts about stocks in 2017? How will it affect your investing right now? In 6 months?
For me, I think the general shape of the curve seems to make sense: stocks rising in the short-term on optimism; then falling after reality sets in. But I see some big red flags here. Currently, as the more detailed report notes the median stock trades at the 98th percentile of historical valuations. A 9% rise in the DJIA would put the median stock in the ~100th percentile of historical valuations. Just think about that. I own a lot of equities, so I certainly hope the market goes up in the short-term and that any new legislation fuels further increases well into the future. That said, given these lofty valuations combined with the uncertainties (and instability?) of the incoming administration, I believe there is much more room on the downside than on the upside for stocks. I’m not putting another dollar of new money into the stock market anytime in the foreseeable future. In fact, I’m looking to take some profits (even if it means I miss out on GS’s predicted 9% gain).
How about bonds?
So where should investors put new money or gains? Are bonds the answer? In the weeks following the election the 10-year treasury jumped to a 16-month high 2.4%. GS predicts the fed will increase rates 3x next year and push the 10-year treasury to 2.75%. That’s it. After taxes net gains on treasuries will be less than the expected 2% rate of inflation. You will effectively lose money with US Treasuries. No thanks. I don’t like it. There’s got to be a better option.
Where is the best place to invest in 2017?
From my perspective the answer is clear: multi-family real estate. Specifically, I like the investment model and track record of OpenPath Investments. Full disclosure: I have been an investor with OpenPath since leaving Google in 2007 and more recently an active partner. OpenPath Investments is a social impact real estate company. We acquire workforce housing (i.e. large apartment complexes) in stable, growing, inventory constrained markets (not SF, LA or NY) and then add value to the properties — with an eye on the environment — while building community for the residents. This short video shows how it works. Why is this the best single investment for 2017?
10 years of Market-beating results.
At OpenPath Investments our approach to social impact investing has delivered positive outcomes for people (working-class families) and the planet while delivering market-beating results and profits for our investors.
Let’s compare OpenPath to afore-mentioned stock market. Again, GS’s prediction is for a 5% gain in stocks in 2017. Looking back, the S&P 500 has a 10-year annualized return of 7.20%. Over that same 10-year period, OpenPath has averaged a 33% IRR (internal rate of return). This pertains to the 8 properties we acquired and sold over this period. The average hold for these properties was 2.7 years and the average multiple on equity was 2.0X. More details on our approach to real estate and our financial performance is in our corporate overview. It should also be noted that real estate offers tax advantages that can enable you to defer taxes on your gains, which makes these numbers even more compelling compared to stocks and bonds.
Does OpenPath expect to see these kind of results going forward? To be sure, the last 10-years have been good for real estate in general. At OpenPath our model has taken advantage of this broad opportunity. Over the next 10 years, we’d be thrilled to match our returns from the last 10 — but we don’t plan for that. Instead we urge investors to set more conservative expectations. Going forward, we expect that new OpenPath opportunities in 2017 will deliver a preferred annual return in the ~6–8% range and total IRR of ~14–15% . These kind of returns still far exceed the recent returns from the Dow and S&P as well as even the most optimistic forward projections for these stock indexes. The above OpenPath projections are general targets and subject to change based on the information we have at the time of any specific investment. As always, we will provide more details and pro forma projections for specific opportunities/properties as these come available.
The Net-Net, when I look at the risk/reward for stocks and bonds in 2017, I don’t like what I see. For me OpenPath’s multi-family real estate and social impact model offer a much more interesting opportunity for strong returns.
If you’d like to learn more, I invite you to visit our site or send me a note at email@example.com.
A couple other posts that I think you will like:
Note: OpenPath investment opportunities are for accredited investors. I am not a CPA or professional financial advisor. All opinions are my own. I encourage you to consult your accountant to fully understand your individual tax situation.