Five years into a bull market in stocks that has brought predictable, double-digit returns to tens of millions of investors probably seems like a bad time to bring this topic up.
But now is actually the perfect time to explore ways to invest that don't involve the stock market. After all, sooner or later stocks will head into a bear cycle, and investors will be scrambling for reliable alternatives.
So here is a list of 10 of those alternatives:
1. Peer-to-Peer Lending
I'm listing this one first, because it's one of my all time favorite alternative investments. And not only that, but it's a type of investment that benefits both the investor and the borrower.
Peer-to-peer lending takes the middleman - a.k.a., the banker - out of the lending equation. Generally speaking, that means a higher rate of return to you as the investor, and a lower rate and fees to the borrower. It just strikes me that this type of arrangement makes repayment of the loan more likely, since it is less expensive for the borrower.
One of the great things about peer-to-peer lending is that it actually provides diversification of the loan portfolio that you're invested in. If you invest $10,000 through Lending Club, the loans may be spread out over dozens, or even hundreds, of individual loans. With that type of diversification, should one or two of the loans go sour, your portfolio won't get clobbered. And the interest rate you're receiving is high enough to compensate for the risk of loss.
"By diversifying in 200+ notes, your portfolio starts to represent peer to peer lending as a whole, and the portion of your investment that is lost to defaults begins to mirror the aggregate loss rate of past years. In short, things become more predictable. It is by spreading your money across hundreds of borrowers at a time that this becomes such a consistent and rewarding way to put excess cash to work." Simon Cunningham from LendingMemo.com
You can invest in a peer-to-peer lending platform, like Lending Club, with no more than $25. But be aware that peer-to-peer lending is not available in all states.
2. Precious Metals
Precious metals, gold in particular, are controversial assets. Some people have near religious faith in them as a foolproof investment. Others see them as a speculative nightmare. As usual, the truth is somewhere in the middle.
The problem with precious metals, and why they seem to be so speculative, is that they only respond in a positive way in certain market conditions. It would be a no-brainer if precious metals would reliably rise when the stock market falls, but that's not the case.
In truth, precious metals are more closely correlated to movements in the dollar. Precious metals gain when the dollar is weak, and fall when the dollar is strong. Since we can never know exactly when those transitions will occur, it's a good idea to have a least some precious metals at all times.
One of the real benefits of precious metals, whether gold or silver, is that it is one of the few assets that you can actually take possession of. You can buy gold or silver coins or bullion bars, and keep them at home or some other safe place. And in the event of a complete economic or financial collapse, they can then be used as barter.
3. An Investment With a Guaranteed Return: Pay Down Debt
This one sounds almost too simple. Maybe you've heard it before, but whatever you've heard, it's absolutely true. If you payoff a credit card where you are paying a 10% rate of interest, that will be the equivalent of earning a 10% rate of return on the same amount of money invested in another asset.
But it's actually even better than that. The return that you will earn on paying off debt will not have income tax consequences. Therefore, paying off debt can produce superior returns to most other investments. And that return is guaranteed, and completely risk-free. If you have debt, this should be your first "alternative investment".
4. The Ultimate Tangible Investment: Real Estate
Real estate is an investment topic that is worthy of its own article, but I'll try to keep it simple and just summarize the main points here.
- Just as the name implies, real estate is a "real asset"; it's a physical commodity that has value in and of itself.
- It is needed for shelter and for economic purposes, such as housing a business, warehouse, or manufacturing plant.
- It can produce income either through rents or capital appreciation or both.
- It is a tax favored investment, with generous depreciation write-offs, as well as favorable capital gains treatment if held for more than one year.
- There are times when real estate booms, and you can literally earn the life fortune investing in it.
- There are times when the market collapses, and investment-worthy bargains are everywhere.
- It's an investment, but it's also a hands-on skill - by managing your own property investment, you become more skilled in real estate investing.
Buying property direct. You purchase a piece of property, either to produce rent income, capital appreciation upon eventual sale, or to rehabilitate and flip for a quick profit.
Real estate limited partnerships. This is where you invest money in a real estate partnership that typically invests in commercial property, such as a shopping center, office complex, or apartment building. You are a limited partner, so you can lose no more than the amount of money invested. There are typically tax advantages to this type of investment, primarily concerning depreciation.
Real estate investment trusts (REITs). These are something like real estate mutual funds, that invest in real estate or real estate mortgages. You buy shares in the REIT, then collect income through dividends and/or capital appreciation. There are also significant tax advantages to REITs. It can be a perfect investment if you don't want to get your hands dirty, and want to limit your risk.
There are other ways to invest in real estate, such as buying and selling mortgage notes, which is more for the sophisticated investor who has a nose for buying debt securities at a discount and collecting a full face value. There is also crowd funding that involves investing directly in real estate deals through websites such as Fundrise and RealtyMogul. But this is a new concept that is in the formative stages right now, and not for the faint of heart.
5. Building Your Own CD Ladder - Your Own Personal Money Market Fund
You're undoubtedly aware that the returns on money market funds these days are microscopic. You can use CDs to improve the returns, and by building a CD ladder, you can effectively create your own money market fund. You won't get rich doing this, but you will improve the returns on the fixed income portion of your portfolio.
Certificates of deposit are completely safe because they are held by banks, and insured by the FDIC up to $250,000 per depositor. They can be the perfect place to park your money during times of high volatility in stocks.
The purpose of building a CD ladder is to create a portfolio of CDs with staggered maturity dates. For example, you can build a portfolio comprised of CDs that mature in one, two, three, four, and five years. The longer-term CDs will pay higher rates of return, then you will have one CD maturing every year for five years. This will provide you with the ability to buy newer CDs at higher rates should interest rates increase.
6. US Treasury Securities
US treasury securities are an alternative to certificates of deposit, and you can even build a ladder with them the way you would with CDs. Typically, the interest rates are slightly lower than on CDs, because the US Treasury is considered to be the highest rated debtor in the world.
- Bills - these are securities that have a maturity date of one year or less.
- Notes - these have a maturity of 2 to 10 years.
- Bonds - these have a maturity of greater than 10 years, and as long as 30 years.
- Treasury Inflation-Protected Securities - these are treasury securities in which the government will increase the principal value of the security, based on the increase in the consumer price index (CPI) - in addition to paying interest on the securities.
Once again, you won't get rich investing in treasury securities, but it is an excellent place to protect your money during times of market turmoil.
7. Collectibles - An Alternative to Penny Stocks
Collectibles - artwork, antiques, numismatic coins, and other treasures - are a lot like penny stocks. Sometimes they payoff, sometimes they payoff big, but most times you just lose money on them.
This is an area where you really have to know what it is you're buying, and the potential resale value. Ideally, you should be sufficiently aware of values that you can buy a collectible for less than it is worth, and sell it for more in a relatively short space of time. This is because collectibles don't appreciate with time the way other investments do. The entire market is based on what a willing buyer is willing to pay for a given collectible at a certain point in time.
The best strategy is to buy a collectible because you truly want to own it and will enjoy having it. This will guarantee that it will have some utility in your life, and you will pay a reasonable price based on your circumstances. If the item happens to fetch more money at a future date, then you'll be ahead of the game - as a result of both your enjoyment of the collectible and the financial gain that you collect at the end.
Collectibles can often be profitable investments during times of dollar weakness. The same factors that draw people to precious metals when paper assets are weak, often also draw them to collectibles as a form of diversification.
8. Wine - Bet You Never Thought About This One!
Wine is one of the few consumable commodities that can actually increase in value with age. But that is exactly what can happen with the right vintages, those that are the most sought after.
You have to have a strong understanding of wine in general, and you also need a temperature-controlled room to store them in. This is because you need to store a significant quantity in order to reap substantial profits. And you will need to keep accurate records of the type of wine, as well as when and where you purchased it. Wine connoisseurs will want that information before buying wine from you in the future.
It can be well worth the investment and the effort. You can earn as much as 15 percent per year if you can identify and store the right wines.
9. Become a Silent Partner in a Small Business
Starting your own business from scratch is a risky venture, maybe even too risky be considered an investment. But you can make a bona fide investment in an existing business. This is possible because small business owners often find it very difficult to get bank financing in order to start or expand the business.
As a small investor, you can provide the investment capital that will enable an existing and successful business to expand. Rather than simply making a loan to the business, you can come in as a silent owner, which will entitle you to percentage ownership of both the business and its income stream.
Best of all, your equity stake in the business can payoff handsomely if and when the business is ever sold. Small businesses the become large businesses represent some of the very best capital appreciation opportunities available.
10. Yourself - Your Best Investment
This is actually the simplest, the lowest risk, and quite possibly the most profitable investment you can make. Best of all, it usually doesn't require a whole lot of money. What you want to do is invest in yourself in such a way that you can improve your income earning ability and your investment performance.
- Take a course or two that will improve your productivity and/or job performance, and will ultimately result in increasing your pay or even land you a promotion.
- Acquire certain certifications or designations that will enable you to get a promotion or start a business. For example, I became a Certified Financial Planner so that I could start a business, help my clients more fully, and increase my income.
- Take on responsibilities at work that will expand your knowledge of your employer's business and increase your value as an employee.
- Work with a career coach who can help you move your career forward.
- Learn more about investing so that you can improve your investment returns.
There are more ways to invest than we commonly think. A five year bull market can make us lose sight of what the alternatives are. But now is the perfect time to be getting ready for the days when the stock market may not be performing so reliably. You may even find that your best investment returns come after the bull market ends.