Finding the right time to invest in oil is a very difficult exercise. Like any other commodity, it doesn't generate income or cash flow. As such, its price is based purely on what an investor is willing to pay for it, which is based on uncertain demand and supply conditions that are extremely challenging to predict with any certainty. It's still not an easy exercise, but investing in assets that generate cash is much more straightforward. With that, here are five investments that throw off cash flow and look more appealing than oil right now. (For related reading, also take a look at 3 Investments On The Rise In 2011.)
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Stocks have had a difficult decade, but history shows that the 10-year period after a prolonged rough stretch tends to be above-average. Stocks also went through two extremely volatile periods in the last 10 years from the bursting of the dotcom bubble and credit crisis. This has scared off many investors that now think stocks are too unpredictable and risky.
But over long time periods, the ups and downs that stock returns exhibit have proven to be worth it. Over the past 100 years, stocks have trounced other investments such as bonds and cash. Additionally, the vast majority generate earnings and many pay dividends, which makes them income-producing. Finally, they are a decent hedge against inflation because companies can largely pass higher costs on to their customers in the form of higher prices.
Bonds have performed well since the 1970s as interest rates have steadily declined over the past 30 years. Lately though, worries have arisen that bonds issued by state and local governments have become extremely risky. This is due to a number of factors, such as falling tax revenue during the current recession and pension worries as retirement packages have grown generous for many government workers and Baby Boomers start to flood the system as retirees.
Certain states are definitely risky and include California and Illinois. But, in general, worries have sent yield up by levels that suggest municipal bonds are worth the risk. Bond giant Pimco has selectively been buying munis, as have other investment professionals that specialize in this space in the bond market. The coupon that bonds pay qualify them as income-producing assets. (To learn more about these bonds, see The Basics of Municipal Bonds.)
Convertible bonds possess features of both stocks and bonds and can be appealing. They let investors capture upside from the stock-return component but allow for downside protection from the bond component. Upside is somewhat capped as convertible bonds won't go up as much as a pure equity, but that means the downside risk is also capped.
Given the characteristics of convertible bonds, they can be appealing when the stock market gets overheated. They can also have appeal on an individual company basis if an investor would like some upside potential but may be worried that the stock could fall substantially. The income-producing requirement is met both from the cash flows that companies generate and the coupons that these bonds can pay investors.
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In similar fashion to stock market returns, venture capital investing has had a difficult decade since the bursting of the dotcom bubble. Venture capital consists of investing in start-up companies or others that are very young. As such, it can be extremely risky, but the rough stretch has caused many VC investors to close shop and means the space has become less competitive. This could boost the returns of the asset class going forward. Additionally, social networking companies are breathing new life into the venture capital community and have already led to big returns for early investors. The cash flow component of this class is also met as investors look for the companies in their portfolios to eventually generate earnings.
The most recent bubble to burst was in residential real estate and also spread to many commercial real estate properties. Continuing the theme to invest in asset classes that are out of favor and generate income, this class qualifies on both fronts. Rental income is the cash-flow stream, and dismal returns over the past five years could reverse course once long-term demand comes back into balance with supply.
Brave investors may want to search for real estate opportunities in California, Arizona and Florida, or those that were hardest hit when the housing bubble deflated. Commercial real estate investing is best left up to deep-pocketed experts, but both segments of the market can benefit from the rents that can be earned from any real estate property. (For related reading, see How To Assess A Real Estate Investment Trust.)
The Bottom Line
Finding specific investments that have appeal in the above asset classes is a final step that is needed to achieve satisfactory returns, but should be an easier endeavor than trying to time investments in oil and commodities in general. Art and other collectibles also fall into this camp as they don't generate cash flow.
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