Archives for January 2018

There are many things that can make up your net worth: cash savings, primary residence, car, IRA, taxable bonds, or private business interest. Visual Capitalist has a infographic called What Assets Make Up Wealth? that shows how this mix changes with net worth. The data is taken from the 2016 Federal Reserve Survey of Consumer Finances.

Some overall observations:

• As net worth increases, the following components tend to make up a smaller percentage of the pie: liquid cash, primary residence, and vehicles.
• As net worth increases, the following components tend to make up a larger percentage of the pie: taxable investments (stocks, bonds, mutual funds) and business interests.
• Most multi-millionaires have business interests as the biggest component of their net worth.

I noticed a few unique quirks in the trends. At the $100k level, primary residence has its biggest share among all of the tiers. Perhaps as you go from the $10k to $100k, you are more likely to own a home and thus it temporarily becomes a bigger component of the picture.

At the $1 million level, pensions/IRAs have their biggest share among all of the tiers. Perhaps above that level, more of your net worth goes into taxable investments. Due to contribution limits, it is hard to hold more than a certain amount in tax-sheltered IRA and pension accounts.

At the $1 billion level, perhaps my eyes are deceiving me, but it appears that the vehicles sliver is nearly twice as wide than for the $10 million level. If a $10 million household has 1% in vehicles, that works out to $100,000. Okay, that’s a Mercedes S-Class or Tesla Model X. If a $1 billion household has 2% in vehicles, that’s $20 million in vehicles! Wow, those $10 million households now seem really tight! It takes a lot more money before they let loose and splurge on some fun toys.

For many songwriters and musicians, their primary asset is the rights to their music. Instead of a house, they have intellectual property. Every time their song is bought for a film, streamed online, or aired on TV they receive a royalty payment for the rest of their lives + 70 years. But what if the artist wanted a lump sum? They would usually sell their rights privately. Royalty Exchange is an online marketplace that aims to do this via public auction instead.

Until recently, you probably never had the opportunity to own income-producing intellectual property. That’s where Royalty Exchange comes in. We’re a marketplace where these types of royalty assets are bought and sold. We specialize in intellectual property with a documented track record of regular, consistent income.

You can view their live and closed listings here. Past auctions include works by Rihanna, Taylor Swift, Jay Z, Dr. Dre, Chris Brown, and Earth, Wind and Fire. You could have bought rights to “Elmo’s Song” from Sesame Street or Wiz Khalifa and Charlie Puth’s “See You Again” (Fast and Furious 7 soundtrack). I wonder if you get paid from any of the 3 billion YouTube views?

You do not need to be an accredited investor, but know that most auctions have ended between $10,000 and $100,000. Often, you are only bidding on a percentage of the complete royalty stake. Royalties are generally paid to you on a quarterly or biannual basis. There may be admin fees charged that vary per listing.

I like the idea of receiving an lifetime income stream, but I am not nearly familiar enough with the music industry to invest in royalties of individual artists or songs. You would think the artist has much more information than you. If they thought their income was going to decrease from the current level, wouldn’t they be much more likely to sell than if they thought income would stay high. I suppose you could say this for any business sale, though.

I’d also worry that the income stream wouldn’t be very reliable as songs go in and out of fashion quickly. The starting yields appear to be in the 10% to 15% range (i.e. $10k to $15k earned last year on a $100,000 investment) at least partially in consideration of this risk. Perhaps these sales are more about risk reduction for the artists.

For a music insider, royalties might be a nice non-correlated asset. But for me, this would be more of a consumer purchase than an investment. It’s fun to look through the listings and imagine owning the rights to a lesser-known song of a favorite artist.

Investment advisory firm Research Affiliates has an interactive Asset Allocation tool that provides estimates of expected returns for many different asset classes and model portfolios. Their default model is based on valuations like the CAPE (cyclically adjusted PE, or Shiller PE) ratio that divides the current price by 10 years worth of earnings. If you believe that valuations like price/earnings and price/book matter, then this database helps show you what is relatively “cheap” or “expensive” in such terms.

Here’s an updated snapshot of expected returns for several major asset classes, as of January 2018. Click to enlarge.

You can see that Emerging Markets and Developed International (EAFA or Europe, Australasia and the Far East) have the highest current expected return. This is explored more in-depth in their article CAPE Fear: Why CAPE Naysayers Are Wrong. Here’s a chart that summarizes their position:

Takeaways:

• US stocks are still relatively expensive based on historical values. Future 10-year expected average returns are around 1% above inflation.
• Broad US (Core) Bonds, Long-term US Treasuries, Short-Term Treasuries, and TIPS are all expected to have low forward returns. Their low current yields offer little alternative.
• Emerging Markets stocks, Developed International (EAFA) stocks, and Emerging Markets bonds (both local currency) are relative bright spots with the highest future expected returns.

These numbers are not very useful as a timing to jump in and out of something. The US has been highly valued for a couple years, yet returns for those last two years have also been quite high. However, Research Affiliates maintains that CAPE and similar valuation tools are a powerful predictor of long-term market returns.

I like holding both US and international stocks in my personal portfolio, and I have been slightly overweight emerging markets for a decade. Emerging markets have been hurting my overall returns for a while now, but knowing that they are “cheap” makes it easier to keep holding them in the hopes of riding the next upward wave. Of course, I’m holding onto my US stocks as well.

p.s. The most recent GMO letter by Jeremy Grantham also puts Emerging Markets as the “single reasonably-priced asset class”.