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”.

It is well-known that the CEO of Berkshire Hathaway (BRK) is Warren Buffett, and that its long-term performance has crushed the S&P 500. This is usually illustrated with an impressive chart like this one from Business Insider:

I’m currently reading A Man for All Markets by Edward Thorp. Among his many impressive accomplishments, Thorp even managed to be an early investor in Berkshire Hathaway. However, an ongoing theme in the book is that edges don’t last forever. He includes a chart in his book about how the performance gap between BRK and the S&P 500 has narrowed over time (I added the pink highlighting):

The book states that the dates were chosen when “the price graphs suggested that they were natural divisions”. Now, even Warren Buffett and Charlie Munger have stated upfront that future returns for Berkshire will be much more modest than in the past. Their current asset size is simply too large. Of course, they still maintain they’ll do just fine, otherwise they’d just give up (or at least pay a dividend). It will be interesting how their edge holds up in the future.

Disclosure: My investment portfolio is predominantly invested in indexed and low-cost funds, but I do hold some Berkshire Hathaway shares in my 5% “play money” portfolio of individual stocks and marketplace real-estate investments. I still want to go to a BRK shareholder meeting in Omaha one of these years.

Here’s another stat to add to your knowledge. For roughly half of Americans, the stock market’s record highs don’t help at all, according to a recent Washington Post article. This chart shows that half of US household have no exposure to stocks, either directly or indirectly:

Direct vs. indirect. The academic paper by Dr. Wolff of NYU was a bit confusing with their terminology. From what I read, “direct” stock ownership means owning individual shares of stock. “Indirect” stock ownership includes “mutual funds, trusts, or various pension accounts”. Here, the term “pension accounts” include defined contribution accounts like IRAs, 401(k), and 403(b) plans. However, assets in defined benefit plans, which is the more traditional definition of the term “pensions”, are not included under “pension accounts”. Social Security is also excluded. Got that?

In theory, you don’t need to own stocks to have a comfortable retirement. You could have a mix of other resources like Social Security, private company pension plan, bank deposits, bonds, whole life insurance, commercial property, residential rental property, and so on. However, I’m willing to bet there is a healthy correlation between owning one and owning multiple forms of these productive assets.

Financial freedom means owning enough productive assets to get off the treadmill of work, spend, work, spend. I know there are probably good reasons why many people have trouble finding the money to invest in stocks. I don’t have an easy fix. However, one small tip for those on the margin is to get that spark and start viewing such assets with desire. The same desire as a nicer car or kitchen remodel. I get excited when I buy another chunk of VTI or VXUS. Others get excited when they acquire another rental property. Find a way to start your snowball.

It would be great if you could invest in things with high and reliable returns, going up and up consistently like clockwork and without worry. Unfortunately, that’s usually the sign of a Ponzi scheme. The chart above illustrates what you have to deal with in the real world. It shows how the S&P 500 (1949-2016) has had both significant losing streaks and big winning streaks, often one right after the other.

The source is Ric Edelman and The Most Important Chart on Investing You’ll Ever See and it comes via Barry Ritholtz and Edelman’s Favorite Investing Chart. Here’s a selected quote from the Edelman site:

This chart clearly shows that when stock prices are rising, they rise a lot and for a long time.

When prices fall, they fall a little and for a short period.

[…]

When you notice that stock prices are declining, don’t be upset. Instead become excited about what lies ahead.

Barry Ritholtz adds:

The usual caveats apply — post Great Depression took 25 years to return to breakeven, and Japan circa 1989 still needs the Nikkei Dow to almost double to get back to the high from almost 30 years ago. If you were retiring during those periods you were pretty much hosed. Still, the cyclicality of markets is very worth noting.

In my opinion, the takeaway is that your investment plan must be ready for both green and red streaks. For one, you need to be able to stay in the market and capture a good chunk of those long green streaks. Bailing out of a winning streak can cause you miss out a lot of money. At the same time, you need to survive those red streaks, which may not look that scary on the chart but are actually terrifying. (Remember that to simply get even from a 50% drop, you’d have to have a subsequent 100% rise.) This can be a tricky balancing act.

I mentioned in my 2017 asset class roundup that the S&P 500 went up every single month in 2017 and how that was the first time that had ever happened. According to the WSJ Daily Shot, the S&P 500 is actually on a 14-month positive streak. Here’s a chart showing the monthly total returns of the S&P 500 from 1990 to 2017.

I wanted to save it for future reference, but I don’t have any good lessons from this chart. I suppose it is good to know that there are a few 10%+ drops within a month. Otherwise, I wouldn’t read too much into it.

Happy New Year! As the markets have closed for the last time in 2017, it’s time for a year-end review. While I do rebalance my portfolio quarterly, I only dig into performance numbers once a year. That’s a big change from a decade ago, when I would calculate my net worth down to the dollar multiple times a week. Here are the trailing 1-year total returns for select asset classes as benchmarked by passive mutual funds and ETFs. Data via Morningstar as of 12/31/17.

Commentary. Most people who owned a diversified portfolio in 2017 had another year of solid returns. I hope you were on the ride. One of my “keep-it-simple” recommendations, the Vanguard Target Retirement 2045 fund (roughly 90% diversified stocks and 10% bonds) was up about 21.4% in 2017. For the curious, you can compare with 2016 asset class returns.

Our personal portfolio, a more conservative mix of 70% stocks/30% bonds as we are close to living off it, was up about 15.1% in 2017. We are at the point where portfolio gains significantly outpaced our employee income this year.

As happens each year, many things happened that I did not predict. I thought 2016 was a pretty good year given higher valuations, but my 2017 returns were twice as high. I certainly did know that the S&P 500 was going to give a positive return every single month of 2017. (This was the first year that has happened, ever.) In addition, stock market volatility was near all-time lows at the same time the threat of nuclear war is probably the highest in my lifetime. Interesting times.

Instead, I have faith that a diversified basket of productive assets (stocks, private businesses, real estate, farmland) has the best probability to be worth more over the long run. In the short run, I will try to spend no more than a modest withdrawal rate of 3% a year, mostly dividends and interest that are automatically distributed. That way, my portfolio will still have the ability to rebound even after an extreme drop in value.

The goal remains to spend my time in a manner that is aligned with my values. I am thankful for another year of physical health, the opportunity to do work that I enjoy, and quality time with family and friends.