The stock market is the best way for most people to build wealth over time. Despite regular dips, its value has moved steadily upward for 100 years. But stocks aren’t the only effective investment vehicle, of course. There are several asset categories that can provide nice appreciation and/or income.
When considering these alternatives, use the same rules that apply to your stock market investments:
- Stay diversified. Over-investing in one alternative asset category could damage your entire portfolio if things go sideways.
- Don’t be a lemming. Following the “hot trend” can lead to diminished returns and increased risk, especially if you are tempted in over-invest.
- Check your emotion. Some alternative investments, including real estate and collectibles, can play on your personal wants, desires and tastes. Remember: You are buying that house, wine or comic book for one reason, and one reason only: Make. Money.
Alternative #1: Real estate – This is the first non-stock investment many people consider. During the pre-2008 go-go years of easy mortgages, it seemed everyone but you was flipping houses or owned three rental properties. It is still possible to generate a nice return on residential real estate, but there are considerable risks, too. If you get stuck holding a house for several months that you had planned to quickly flip, the carrying costs could devour a huge portion of your profits. One terrible tenant in a rental property can do the same thing.
Anyone considering real estate as an investment should do a ton of research and develop some decent expertise before signing a mortgage. An alternative is to hire professionals to help select, fix-up and/or manage your properties. That expertise doesn’t come cheap and needs to be factored into your business plan.
Alternative #2: Precious metals -- Many people like to hold physical assets. Gold and silver are the most popular to own because of their universal value and easy of storage. Well, that and the relentless cable TV advertising that makes it sound like we’re on the verge of an economic collapse that will lead to a “Walking Dead” type world where gold is king.
You can acquire gold or silver as ingots, coins or jewelry and toss it your safety deposit box. Yes, precious metals do store value nicely, but they really aren’t a great way to grow wealth, and there really isn’t an efficient market for liquidating such holdings. What’s more, when you buy an ingot from that guy on TV, or a gold necklace, you are paying retail and paying for more than just the value of the metal.
Alternative #3: Collectibles – Wine, art, vintage cars, historic memorabilia, comic books. These are just a few of the collectible assets that have shown reliable growth over the years. Success in this area requires deep knowledge of the category to choose wisely and avoid getting scammed. You also need significant money to play meaningfully in this arena. Investing in two or three bottles of wine is like buying just a handful of Apple share. Nice, but probably not life changing. And, again, you must keep the emotion out of these investments. You may not be a Donald Duck fan, but one of his comics is up 16% in value year-to-year.
Alternative #4: Peer-to-peer lending -- Online companies like Lending Club and Prosper can match you with businesses and individuals looking for loans. An Atlanta company called Groundfloor allows small investors access to private real estate deals. If all goes well, you get a higher return than you’d earn from, say, a money market account, and the borrower gets a lower rate than a bank would charge.
Be careful with this category. Remember that many candidates are seeking P2P lending because they couldn’t qualify for traditional financing. Dig deep before you write a check.
Bonus: Treasury bonds – Since you have read this far, you deserve a bonus alternative. This low-risk alternative investment sits at the opposite end of the spectrum from investing in Ferraris, or lending $10K to three college kids who are developing an app that will allow pizza places to bid for you next order. Treasury bonds don’t pay much interest, currently about 2.5%, but they carry nearly zero risk.
All of these investments can add value and diversity to your portfolio. But as I noted up top, the plain ol’ vanilla stock market generates wealth like a boss. Make sure you’re taking full advantage of the market – by, for example, maxing your 401k contribution -- before getting too deep into other investments.
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Disclosure: The information is provided to you as a resource for educational purposes only. Nothing herein should be considered investment, legal, or tax advice. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. It is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.