If you’re like most people, your annual household spending was down significantly in 2020 because of the pandemic. Saving money must have been on everyone’s mind, because the U.S. savings rate saw massive increases in 2020. By January of 2021, the U.S. savings rate had increased to 20.5%.
That’s certainly a lot of cash being saved! Bank deposits are now at record highs, and credit card spending is down 14%. Households have been deleveraging over the past year, and that certainly seems like a good thing!
There’s also the possibility of a new government stimulus check coming soon. If that stimulus bill passes, a lot of new money could be landing into many bank accounts very soon.
The question is, what should you be doing with all that extra cash? Should you be investing it? If so, where?
First, The Obvious Choices
First off, if you’re one of the folks impacted by job loss, unemployment, or other personal financial difficulties, having all this extra money is going to be an absolute godsend. Paying bills and feeding your family should absolutely come first during troubled economic times. There’s no doubt this should be your first priority for any excess cash.
Next up, paying-off any high-interest debts — like a credit card. While this may seem obvious, deleveraging during times of uncertainty is a very good step to shore up your finances.
Following that, if you haven’t built a 6 month emergency fund, NOW is a good time to put that into place. There’s no time like the present!
These are the basic first moves everyone needs to know in personal finance. Get yourself into a solid financial position first, before you start investing.
It can be tempting to chase after hot investments in the news (like GameStop), or other “story” stocks before you’re ready, but I can’t stress enough the importance of having solid financial defenses in-place before you take on financial risk.
Stocks Aren’t Completely Terrible
Under normal circumstances, most people would say “invest in an index fund” as a good place to put your excess cash. The problem is, with stock markets near all-time highs and interest rates at near all-time lows, the opportunities for a safe investment in the stock market seems a little bit — iffy.
The CAPE ratio is near all-time highs, which implies lower return expectations for 2021. Some analysts are even saying stock returns could be as low as 2-3% in the coming year!
So where can investors SAFELY put that extra cash, without taking on undo risk? That really is the million-dollar question!
Depending upon who you ask, the economy could do a number of different things — Interest rates could drop even further, the stock market could crash, the stock market could surge, inflation could take off, and various other dire predictions. It’s anyone’s guess what’s going to happen!
The predictions run the gamut, but one thing remains true — Absolutely nobody can predict the future accurately.
So don’t immediately believe a stock market index is a terrible place to put money right now just because some pundits are shouting “low returns”, “bubble!”, or “market crash!” from the rooftops.
While there are no-doubt some very frothy sectors of the stock market, we must remember why investing in stocks has been so incredibly profitable over long periods of time — Many of the businesses trading on public stock markets have been absolutely incredible at compounding value over time. They compound money year after year regardless of what the stock market does.
If you have a long enough time horizon (say 10+ years), there’s still a decent chance you’ll make money even if you invest excess cash at these high stock market levels. Yes, you have to be very patient. The market could crater tomorrow and take ten years to recover. You just never know!
But what if there were other decent investment options out there? What about the so called “overlooked” areas of market?
Unloved Investment Areas
Believe it or not, the stock market is a very fashionable beast. It loves to bid up what’s fashionable and sell what isn’t fashionable. Last year, tech stocks and other stay-at-home stocks were the fashion queens. Those stocks had huge runups. Meanwhile, the shunned areas of the stock market either fell, or significantly lagged behind the rest of the market.
Which areas of the market were unloved last year? — Energy, Financials (banks), Travel stocks, and REITs were major laggards.
Why would you want to buy unloved stocks? Remember: Lower prices actually mean higher returns over time. Dividend yields also tend to be higher in value-oriented areas of the market.
I’ve already written profusely about my love for bank stocks late last year, and I’ve been buying-up shares ever since that post. Even though bank stocks have risen significantly since then, there’s still plenty of value to be found therein.
For example, I could go and buy the SPDR S&P Bank ETF (Symbol: KBE) and realize a 2.44% yield. Meanwhile, the S&P 500 is only yielding 1.5%. That’s a significant difference! If the market crashes you’ll be paid a whole lot more to own KBE while you wait for share prices to recover.
The same goes for energy stocks — Individual stocks like Chevron (Symbol: CVX) are yielding 5%! If you’re not into buying individual stocks, an energy ETF like Vanguard Energy Index Fund (Symbol: VDE) can keep you fed while you wait with a 4.53% yield.
The travel sector unfortunately has noticeably fewer yield producing options. That’s just the way the travel sector rolls, but you can still buy a diversified basket of travel stocks using travel ETFs:
- U.S. Global Jets ETF (Symbol: JETS)
- Invesco Dynamic Leisure and Entertainment ETF (Symbol: PEJ)
- ETFMG Travel Tech ETF (Symbol: AWAY)
Leisure travel almost completely dried up in 2020, but it’s likely to see a big resurgence in 2021 as people get vaccinated. Perhaps travel stocks will be the big winners in 2021? I’m certainly excited at the prospect of traveling again!
REITs Could Be A Safe Haven
REIT’s (otherwise known as Real Estate Investment Trusts) are definitely a different way to invest money. As you would expect, REITs invest primarily in real estate. What you might not know however, is that they must return 90% of taxable income to their unit-holders.
This means REITs pay out large dividends, but don’t tend to see a lot of capital appreciation. There’s nothing wrong with that of course, it’s just the nature of the beast when investing in REITs. (The rules of the game are a little different.)
Historically, REITs have seen similar returns to the stock market (with dividends included), but tend to be slight less correlated with the overall market. (Four Pillar freedom gives a nice breakdown of the correlation between stocks and REITs in this post.)
So, if you’re expecting a stock market crash soon, REITs might be a decent place to ride out the storm.
Another interesting way to capture a potential resurgence in travel is through hotel REITs. If people start traveling again, they’ll need places to sleep. Hotels of all kinds should see a big increase in business, and it just-so-happens that there are many hotel REITs available to investors.
Hotel REITs also tend to be very diversified and act a bit like “hotel mutual funds”, as they own many hotels across many different markets and hotel brands. Brands like Hilton, Hyatt, Marriott, and dozens of others can be represented by just one single hotel REIT!
Here’s a few good hotel REITs that come mind:
- Host Hotels and Resorts (Symbol: HST)
- Apple Hospitality REIT (Symbol: APLE)
- Summit Hotel Properties (Symbol: INN)
- Sunstone Hotel Investors Inc. (Symbol: SHO)
While some hotel REITs have already seen their share prices begin recovering late last year, there’s still plenty of room for share prices to recover even further.
Cash Isn’t Trash
Last but not least is the asset class that everyone loves to hate on! Cash! Yes, keeping it as cash is a viable option!
Right now, with all the stimulus money floating around the economy many so-called “experts” are predicting massive inflation in the year ahead. But here’s the thing — We’ve seen no data indicating inflation is taking off. The most recent data we have from the U.S. Bureau of Labor Statistics indicates that inflation is a tame 1.4%.
To quote a recent speech by Fed Chairman Jerome Powell, “Inflation dynamics do change over time, but they don’t change on a dime.”
Meaning, if inflation begins to pick-up, you’ll probably see plenty of warning signs. So it’s probably OK to hold on to cash in your bank account (at least for a little while) if you want to see how things “shake out” with the stock market and the COVID recovery. If that’s the case, I certainly don’t blame you!
The Buffett Indicator, which has predicted many recent stock market crashes, is sitting near all-time highs. Given that, and the very-high CAPE ratio, I think it’s actually prudent to hold a little extra cash.
Don’t feel like you have to invest every last penny immediately!
While I’ve presented a number of different investing ideas here for your excess cash, I’d like to emphasize that in no-way can I predict the future. I’m absolutely terrible at fortune telling.
The market could literally do anything in 2021, and anyone who tells you otherwise is probably not telling the truth. Avoid the snake-oil salesmen trying to sell you tomorrow’s hot stock. (For the record: I’m not selling any investment mentioned in this post)
Instead, be prudent and try to make safe investing choices — Avoid investing in assets that seem excessively overpriced, and avoid investments that use too much leverage. Try to find investing areas that are at least relatively undervalued, and have a history of compounding value in all market conditions.
Do this, and then be patient.
Investing is the art of planting a seed and letting it grow. Compounding takes a lot of time. You won’t get an orchard overnight overnight, so don’t even bother setting your expectations on buying the next Tesla.
That’s it for today! Thanks for reading everybody! As always, please share your thoughts in the comments!