Some experienced investors believe that having a diverse investment portfolio helps to both manage risk and increase overall potential returns. Because of this, there has been an increase in interest for alternative investments.
In today’s economy, building wealth may take more than a traditional 9-to-5 job and investing in stocks, bonds, and mutual funds. Smart investors will look for new opportunities to invest that may come from the current situation.
If you are new to alternative investments, now may be the perfect opportunity to research different stock market options and alternative investment ideas that you may not have been familiar with in the past. Even though alternative investments have always been a choice for determined investors, since investments beyond stocks are not as well-known, many people may not confident about investing in them.
What are alternative investments?
An alternative investment is an asset that is not stocks, bonds, or cash.
One of the advantages of an alternative investment is that they typically act differently than the stock market. When the stock market goes down, an alternative investment may not go down as much as stocks and may even increase in value during a market downturn.
Many alternative investments may have a low correlation to the stock market, and may perform better when the equity market is flat or down. Certain alternative investments also act as an inflation hedge, and may generate returns and protect investment capital through all stages of the economic cycle.
Alternatives to the stock market
There are many investment options outside of the stock market, each with its own risks and rewards. Be sure to research each option before investing to find the best fit for your goals.
Rental Property
Investing in real estate is one of the first things that comes to mind for many people. Buying a home is seen as a key step on the way to financial stability, but in order for it to create wealth, you will want to purchase a property that will generate income for you.
A recent decrease in homeownership rates has led to an increase in demand for rental properties. Purchasing a rental property could be a great way to improve your financial situation.
An investment in rental property can provide returns through rent payments and potential appreciation in value. However, being a landlord can be a lot of work. Being active or passive in your role as landlord depends on how much time and effort you want to put in to the property.
If you don’t want to manage tenants and handle maintenance, you can hire a property manager, which will reduce your potential return on investment.
Real Estate Investment Trust (REIT)
REITs are non-stock investments that allow investors to generate income by investing in real estate indirectly. A REIT may be a good alternative to managing a rental property on your own. REITs are entities that either own or finance income-producing properties.
Trusts are required to pay out most of their income to shareholders. A REIT is a pool of real estate assets that you can invest in without needing a lot of capital upfront. The properties are managed by the trust, and most of the income from the trust is paid out to shareholders.
There are primarily three types of REITs:
- Publicly Traded REITs issue shares listed on national securities exchanges and as such are regulated by the U.S. Securities and Exchange Commission (SEC). Their shares can be bought and sold by individual investors.
- Public Non-traded REITs are not available to investors on a stock exchange but are nonetheless registered with the SEC. They have lower liquidity and are typically not impacted by market fluctuation and so provide more stability than publicly-traded REITs.
- Private REITs, or private placement REITs are only available to an exclusive group of investors. They are not publicly traded, do not need to be registered with the SEC, and are generally not liquid.
Equity Crowdfunding
Websites that allow people to invest in small businesses by buying equity (a part of the business) instead of stocks may be a good option for people who want to own a part of someone else’s business. With this investment, there is the potential to make money if the company succeeds, but there is also the risk of losing the entire investment if the company fails.
As Money Crashers reports, equity crowdfunding is one of the most popular nontraditional options for financing and investing in an early-stage business. The top equity crowdfunding sites for investors and entrepreneurs include:
- AngelList
- Microventures
- Fundable
- StartEngine
- EquityNet
Although there are many different types of crowdfunding websites, some of them focus on real estate investments. These websites, like Fundrise, CrowdStreet, and EquityMultiple, accept money from both accredited and non-accredited investors, with the minimum amount being $500.
Peer-to-Peer Lending
These platforms serve as the middleman between the borrower and the lender, similar to how a bank operates. Some investors focus on owning equity, such as purchasing real estate or investing in a crowdfund. Others invest money in the debt end of the capital stack.
P2P lending platforms are like crowdfunding in the way that investors pool their money together to give to a borrower after completing research on them. The borrower then makes monthly payments that include the original amount plus interest. Since this investment involves more risk, the returns are generally higher.
According to U.S. News & World Report, four of the best peer-to-peer lending sites for investors this year are:
- Kiva
- Prosper
- Funding Circle
- Peerform
Franchise
Franchising can be a great way to diversify one’s investment portfolio and to grow wealth with a stock market alternative. When a person purchases a franchise, they are buying a license to run a business under the name of an already-established business. For example, a franchisee could buy a license to open up a McDonalds, Dairy Queen, or even a Holiday Inn.
Gold & Silver
Gold and silver have been seen as valuable assets for a long time. They are seen as a way to store value for the long term, and an option to fiat currency when inflation is high or the economy is unstable. Gold usually does not move in the same way as the stock market, making it a good option to stocks.
According to Montreal-based Kitco Metals, the price of gold has increased by nearly 640% since 2000, moving from about $283 per ounce to $1,802 per ounce (as of July 2021).
As an example, during the 2007-2009 global financial crisis, one ounce of gold grew by about 270% and the S&P 500 declined by about 50%.
Private Equity & Venture Capital
Private equity is an alternative asset class that is popular among institutional investors.
There is a higher demand for private equity than there is a supply, according to Forbes. Private equity is an investment in a company that is not publicly traded, and the money is often not available for up to 10 years. This is because the private equity fund sells to another buyer or takes the company public.
According to CB Insights, some of the best private equity bets for early stage companies have included WhatsApp, Facebook, Groupon, Cerent, and Snap. These companies have the potential to disrupt existing legacy businesses or rapidly expand into a new marketplace.
Even though it is possible to make a lot of money from venture capital, it is important to know that most of the profits come from a small portion of the deals.
Owning a Business
Over time, investing in a business can potentially lead to a steadier income and growth compared to other investment options. Although there is always the risk that the business may fail and you may lose all of your initial investment, the potential for gain makes it worth the risk for many people.
Some people may choose to buy a business in a box (franchise), where the initial investment can be more than $5 million. As Entrepreneur reports, the top franchises to purchase this year are:
- The UPS Store
- Culvers
- Kumon Math & Reading
- Planet Fitness
- Servpro
Cryptocurrencies
Blockchain technology allows buyers and sellers to transact business directly without the need for a middleman. The best known cryptocurrency is Bitcoin.
In July, 2021, Bitcoin was the world’s most valuable cryptocurrency, with a market capitalization at the time of $749 billion. This represented nearly half of the global cryptocurrency market, which was worth $1.55 trillion. Bitcoin is also an investment held by institutional investors, family offices, and publicly-traded companies like MicroStrategy, Tesla, Galaxy Digital Holdings, and Square.
Some investors are willing to take on a high level of risk in order to potentially make a lot of money by investing in cryptocurrencies.
Since cryptocurrencies began attracting attention from investors in 2017, the price of the cryptocurrency has fluctuated wildly.
As with any alternative strategies, do your research and understand what you’re investing in. If you don’t understand it, the odds of losing your entire investment is great.
Not sure where to start?
These are just a few of the investment opportunities that are not correlated to the stock market and may help protect your portfolio from economic fluctuations of the traditional market.
All it takes is some research, a change in perspective, and a willingness to take risks. Even during economic recession, there are chances to make a profit if you think creatively.
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