What are contrarians investing in?

+ how to get a 5% yield from investing in small business loans

Issue #16. 

Happy Friday to all of you, and welcome to our issue #16! Hope you’ve had a financially prosperous week. In this week’s edition of the Gist, we’ll discuss contrarian investing ideas, getting a 5% yield from small-business loan investments & ways to catch up on your retirement savings.

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So here are the questions for today’s edition: 

  1. I’m 35 years old and falling back on my retirement savings. In the past, I wasn’t able to save much of my income for retirement. My salary now is significantly higher—how much of my income should I save to retire by 65?

  2. What are contrarians investing in these days?

  3. I’m looking for a solid (5%) investment yield; are small business loans a good opportunity for high-yield investors?

Let’s give you the summary first.

Summary

  1. Fidelity has a rule of thumb you should save at least 15% of your pre-tax income each year for retirement (this includes employee contributions). If you’re starting late, say in your 30s (instead of 25), you should add approximately 0.8% for every year you didn’t save for retirement. If you’re just starting to save for retirement at age 35, you will want to save 23% of your pre-tax income. See the chart below from Fidelity.

  2. Contrarian ideas aren't for everyone, and they shouldn't dominate your portfolio. They're best at the fringes. Here are some contrarian ideas for you: A. US small-cap value funds; B. health care and biotech stocks; C. energy sector (this year’s worst performer).

  3. Small-business loans are a viable way to get a 5% yield, but they are also riskier than FDIC-insured accounts. Two of the best-known investment platforms for small business loans are StreetShares and Worthy Bonds. There could be a penalty for an early withdrawal, but that’s product specific (e.g., Worthy Bonds does not charge a penalty for an early withdrawal). 

Deep Dive

  1. The single most important thing you can do to build your retirement nest egg is to start saving early. The earlier you start, the more time you have for your investments to grow—and recover from the market's inevitable downturns.

    Fidelity’s 15% savings rule of thumb assumes that a person retires at age 67, which is when most people will be eligible for full Social Security benefits. If you don't plan to work that long, you will likely need to save more than 15% a year.

    So what can you do if you’re starting late? Take the 1% challenge, e.g., save 1% more for retirement each subsequent year. Also, save your pay raise for retirement. After 20 or 30 years this could make a big difference for your total savings, because savings, if invested properly will grow at a compounded interest rate.

    Other things you can do to boost your retirement nest egg include maxing your 401k and IRA contributions before you hit the annual contribution limit, pursuing a more aggressive investment style (check out the aggressive portfolio option in our lazy mutual fund guide), and using catch-up contributions for your 401k and IRA if you’re over 50 years of age.

    Things you should not do—don’t stop investing, and don’t rely on trading tactics and invest in risky securities (e.g., leveraged ETFs such as UGAZ or NUGT) to boost your savings. You’re likely to lose money that way.

  2. Here are a few more thoughts on our contrarian picks:

    • Value stocks of all market capitalizations have been neglected by investors. In addition, despite the most recent US stock market rally, large caps stocks have disproportionately profited from investors’ sentiment upswing. What do you get by combining those two trends? Small-cap value stocks could be the next big contrarian opportunity! Here are three US small-cap value funds for you to consider.  

    • The healthcare sector is up about 12% this year, while the broader market as measured by the S&P 500 is up about twice that. While healthcare has done well, there as still a dozen of stocks that are considered undervalued by a number of measures. Two ‘undervalued’ stocks that caught our attention are Alexion and Biomarin.

    • The energy sector is this year’s worst performer. Besides investing in the entire sector, you may want to consider oilfield services stocks, which remain at record-low valuation levels. Other opportunities we see are investing in midstream (e.g., EPD and MPLX), exploration & production, as well as major integrated companies.  

  3. Small business loans are different from corporate bonds and bond funds that trade on the stock market, because they are private market investments. Two of the best-known investment platforms for small business loans are StreetShares and Worthy Bonds. Both platforms offer a 5% yield on your investment.

    The loans are backed with physical collateral. If a borrower defaults, the investment platform could use the collateral to repay the investors. Investors may not get the entire investment amount back in case of defaults.

    Small business loans are not a substitute for FDIC-insured accounts. This investment option is significantly riskier than high-yield savings accounts.

That’s it for this edition.  What would you like to hear about in the next Gist?  Ask us a question here.

The AskFinny Team