by Jeff Rose
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.
There are several characteristics of real estate that make it a desirable investment:
- 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.
There are several ways that you can invest in real estate:
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.
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Note: Featured Image credit to tniproperties.com