If you’re anything like me, you may currently be a bit wary of the financial markets. Stocks and bonds seem to perpetually float along on a fluffy cloud of central bankers’ good intentions. They are oblivious to the fact that, completely untethered from reality, they have drifted far from their fundamental valuations. And yet it is usually simply not possible to “drop out” of the financial markets altogether. We are often stuck holding stocks, bonds, mutual funds and other potentially overvalued securities in our brokerage accounts due to the lack of an acceptable alternative.
There is a vague, unsettling apprehension that at least some of the stocks and bonds in our portfolios may be, in effect, Monopoly Money. Many of us fear that one day we will wake up to discover a portion – or even most – of our hard-earned savings has evaporated in a cloud of financial volatility, discontinuous markets and bitter regret. But what recourse does the average investor have?
What if there was a painless way to crystallize some of the gains from your paper assets into real, tangible wealth? A method that wouldn’t force you to make heroic asset allocation decisions like “going all in” on the market or “sitting this one out” while stocks rally without you? You’ll be pleased to know that a simple yet compelling investment strategy does exist.
It involves redirecting the income produced by a portfolio of traditional assets into investment grade art or fine antiques. I call this the income-to-art strategy. For example, let’s suppose your brokerage account holds an equity mutual fund with a total account value of $50,000. The mutual fund has a distribution yield of 2.5%. So your accounts receives $1,250 in distributions annually ($50,000 x 2.5% = $1,250).
Now you could take this $1,250 in cash and reinvest it right back into your mutual fund. But that would mean leaving all your cash in the very unpredictable and somewhat questionable financial markets, which isn’t something you generally want to do. Instead, you could divert that $1,250 into tangible assets – fine antiques or art of your choice. This technique reduces your risk by removing your “winnings” from the stock and bond market casinos.
And the best part about this strategy is that it is dead simple. It works with any kind of income stream derived from a financial asset. Dividends from stocks or REITs, interest from bonds and even premiums from option writing all work equally well.
However, one complication is that many of us have our nest egg stashed away in retirement vehicles, usually 401-k or IRA accounts. These retirement accounts specifically prohibit investments in “collectibles” including investment grade art and fine antiques. And if you haven’t reached retirement age yet – generally defined as age 59 and 1/2 – you cannot withdraw funds from these account types without paying a penalty.
On its surface, this would seem to disqualify retirement accounts from employing our income-to-art strategy. But there is an easy way to get around these restrictions. If you are currently contributing money to a retirement account, you can simply reduce your contributions by the amount of income the account spins off. This will provide you with unrestricted funds outside of the retirement account equal to the amount of the dividends and interest accrued inside the account. You can then use these unrestricted funds to directly purchase art, fine antiques or any other tangible assets you like.
The only situation where this trick isn’t advisable is if you are receiving a matching 401-k contribution from your employer that vests immediately. In that case, you would want to continue making large enough contributions to your 401-k to ensure that you receive the full match. A fully vested matching contribution from your employer is essentially free money, even if it is locked up in a 401-k.
There are few easy investment answers in a world of overvalued paper assets. Determining the right course of action to secure your financial future can be daunting. Investing in fine antiques and art can be a compelling alternative to holding traditional stocks and bonds. The income-to-art reallocation strategy is a simple, but powerful way to reduce financial risk in an unforgiving world.
