Stock Market Alternatives-Why Alternative High Yield Investments Might be for you
What are alternative investments? The set of correct answers to this question is extremely large. Alternative investment examples range from cryptocurrencies such as Bitcoin to shares in a private company. Essentially, any investment you make without going through one of the major stock, bond, or commodity exchanges can be considered an alternative investment.
Alternative investments attract investors who are looking to diversify away from the market and reduce volatility. Incorporating alternative investments in your portfolio allows you to reduce the correlation between your portfolio and the general market. The best alternative investments are, arguably, those with negative correlations to the general market. This means that their returns and losses are independent from stock and bond market returns and losses.
The advantage of lower correlations between alternative investments and the stock market or bond market means that should traditional markets decline, your alternative investments could shore up the value of your total portfolio.
Many alternative investments are only available to accredited investors. In short, an accredited investor is a wealthy individual with strong financial experience; the SEC allows these individuals to purchase investments that are not registered with the SEC. To determine whether you are an accredited investor, consult the federal definition here.
Who Should Invest in an Alternative Investment Platform?
Experienced investors with the majority of their capital invested in traditional investments are most appropriate for alternative investmenting for their remaining capital. In general, alternative investment ideas are suggested for surplus funds available after you have created a portfolio that will meet your financial goals. Only after designing a traditional portfolio, which likely includes cash for emergencies, should you consider alternative investments such as cryptocurrency.
Reasons to try alternative investments:
- To diversify beyond stocks and bonds
- To speculate, seeking high-risk, high-reward returns
- To reduce overall portfolio losses by reducing correlation with the stock market
- To gain exposure to markets unreachable by traditional investments
Pros and Cons of Alternative Investment Platforms
What are the Best Alternative Investments and Investment Platforms?
The best alternative investments ultimately depend on the individual investor. Investing outside of the stock market has its pros and cons. You’ll need to complete thorough due diligence into the company, it’s founders and risks. In most cases your money will be tied up for several years, versus in the stock market, where you can sell at a moments notice. Let this be a guide for your future research:
1. Real Estate
For many, real estate is the ultimate alternative investment. Apartments, vacation lodgings, and offices can act as alternative high-yield investments. The purchase of physical property as tangible assets can produce returns via rent income and via selling the property at a higher price (flipping). Real estate, as an investment alternative, often produces high return on investment (ROI) and comes with relative safety, as property is always in demand.
However, real estate does not always appreciate and can lead to losses. Liquidity, too, can pose a problem: Selling property is expensive and requires lots of work (e.g., open houses, dealing with real estate agents, handling current tenants) and is more cumbersome than selling a stock. Many small problems can pop up too: not all tenants are stable in their rent payments; repairs are needed on occasion; taxes and other fees can eat into your profits.
You can often bypass such issues via investing through real estate investment trusts, which can also bestow tax advantages and cash flow.
2. Real Estate Crowdfunding
Real estate crowdfunding is a novel method of investing in the real estate market passively (i.e., without having to manage tenants). The basic idea of real estate crowdfunding is to pool the funds of investors and use those funds to buy one or more properties. This sort of real estate alternative investment appeals to investors intimidated by the large barriers to entry otherwise common in real estate investing and also typically does not require large amounts of minimum capital. Real estate crowdfunding also gives individuals access into the commercial, farming, and industrial real estate markets.
The real estate crowdfunding market is huge. Here are a few real estate crowdfunding investing platforms to check out (some offer alternative high yield investment fund too):
Diversyfund – This is a company that invests in multifamily properties that are appraised to appreciate in value over time. The firm upgrades the property and resells it at a profit. It comes with zero management fee – a rarity – and requires a minimum investment of only $500. With Diversyfund, you can invest money in multifamily apartments, an investment opportunity out-of-reach for many investors, and you do not need to be accredited.
Groundfloor – Groundfloor enables the average Joe or Jane to invest in real estate notes (loans) that are secured by real property. The loans include single-family homes and townhouse. In addition, the minimum investment with Groundfloor is a mere $10 and available to non-accredited investos. Groundfloor has a less-than-average rating at the Better Business Bureau, so due diligence is advised before investing with them.
Peerstreet – Peerstreet is for accredited investors only. With Peerstreet, you set your investing preferences, and your funds are then automatically allocated to the most suitable real estate loans in the company’s profile. Instead of buying real estate outright, your investment with Peerstreet funds loans, resulting in high single-digit annual yields.
Fundrise – Fundrise offers both equity and debt real estate investments. The minimum capital investment ranges from $10 to $100,000, based on your investment type. The investments you get with Fundrise are relatively illiquid, meaning that your capital will be locked up for a few years. Be sure that the capital you invest with Fundrise won’t be needed in the near future. In essence, when you invest with Fundrise, you are investing in a real estate project and cannot expect your funds returned (with interest) until the project is complete. Fundrise has offers for both accredied and non-accredited investors.
3. Hedge Funds
Illiquid and available only to accredited investors, hedge funds are market-specific investment portfolios run by highly experienced or talented fund managers. These managers are paid high fees for their services. But hedge funds still attract many investors due to fewer restriction which create the potential for high returns – with high investment risk, of course.
Non-accredited investors can use robo advisors as an alternative investing platform to hedgefunds. Titan and M1 Finance are two popular options.
Titan – The Titan investment strategy is similar to that of many hedge funds. Titan aims to “hedge” your portfolio against stock market downturns while still outperforming against a general market benchmark. They’ve recently added cryptocurrency to their offers. The minimum investment amount is $100, and the fee is $5 per month for accounts below $10k and 1.00% AUM for accounts above $10k.
M1 Finance offers several investment portfolios that mirror those of famous hedge fund managers:
Cryptocurrencies, or crypto for short, are attractive to investors due to their unique features. The underlying technology of cryptocurrencies, the blockchain, allows for a computer network to authenticate transactions, essentially decentralizing the currency. For this reason, governments and banks have little power to sway the price of this alternative investment, allowing true price discovery without authoritative manipulation.
Here are a few ways to invest in crypto:
Grayscale Bitcoin and Ethereum Trusts – You can invest directly in the funds (https://grayscale.com/) if you are an accredited investor. You can also invest in crypto currency funds via Wealthfront without being an accredited investor.
SoFi – SoFi allows you to buy crypto without having to manage the cryptocurrency itself (e.g., wallet and storage). SoFi has lower fees than many of its competitors (e.g., Coinbase) and is thus a great alternative investment for investors who intend on making frequent transactions.
Robinhood – Otherwise a stock broker, Robinhood notably earns over 20% of its revenue from cryptocurrency transactions and is thus becoming a serious mainstream platform for cryptocurrency investors. Robinhood currently offers seven different cryptocurrencies on its platform, from the popular Bitcoin to the lesser-known BSV (Bitcoin Satoshi’s Vision). Newer coins are yet unavailable, and your cryptocurrency holdings in Robinhood are under the company’s (not your) custody, which can be a downside for investors.
Directly through Coinbase, eToro, or other cryptocurrency exchanges. These crypto exchanges enable you to buy many coins directly and maintain control with your own wallet.
5. Peer-to-peer Lending
Peer-to-peer lending is an online phenomenon of bringing lenders and those seeking loans together, bypassing the traditional lending methods (e.g., banking). In essence, with peer-to-peer lending, you lend money, accepting risk of default. Lending money through peer-to-peer lending platforms produces loans that are unsecured but with attractive yields for creditors. Peer-to-peer lending also requires you to tie up your money for longer periods of time.
Consider the following platforms for this alternative high-yield investment:
- Funding Circle
6. Fine Art
Other than buying fine art outright in hopes that it appreciates in value, you can invest in fine art funds, which pool investor capital together to buy art. These funds typically have minimum investments that range from thousands of dollars to millions and are thus elusive to investors with small amounts of financial assets. Those investors who have limited funds can buy signed lithographs of prominent artists for under $1,000. Here are a couple areas to check out should you be interested in investing in fine art:
- Galleries, auction houses, museums
Investing in commodities is the investment in the resources of the industrial and consumption economy, resources such as precious metals, agriculture products (e.g., coffee), and energy (e.g., oil). Investors rarely buy commodities outright – i.e., no one really wants to buy and store tons of beef or wheat – and instead use future contracts. Trading futures is highly specialized, coming with large amounts of risk, and thus the best way for the average investor to gain exposure to commodities is typically through managed funds or exchange-traded funds that hold commodity futures.
A disadvantage of commodities investing is that you do not receive dividends. When you buy a commodities fund, you expect the fund to increase in value, so that when you sell, you’ll receive a profit. Here are a few diversified commodities ETFs:
- Invesco DB Commodity Index Tracking Fund – DBC
- iShares S&P GSCI Commodity-Indexed Trust – GSG
Farm and ranch land are types of real estate investments that come with unique features. They are typically complex investments in terms of taxes and come with potential for total loss, such as via fires or earthquakes. They are also highly illiquid. If you are still interested in these unique assets, please more about farmland investing, as it describes farmland in more detail, along with two platforms the average investor may employ. Consider farmland as real estate investing; thus, all the risks inherent in real estate investing apply.
Here are a few ways for accredited investors to invest in farmland:
9. Tax Liens
When a property owner fails to pay their taxes, the municipality puts a lien or legal claim, on their property for the amount of unpaid taxes. Tax liens are then sold at auction to the highest bidder.
The initial payment you make after winning the auction is used by the municipality as a substitute for someone’s unpaid property tax. When the taxes are paid, you receive the money plus any penalties that the taxpayer paid.
Since many municipalities switched to online platforms to sell tax lines, big banks and financial institutions find it easy to bid on multiple tax lien actions, making it harder for the smaller investors to compete. An individual investor is more likely to have greater success when attending tax lien auctions in-person.
To learn more, there are articles online and books to teach you the basics.
10. Gold and Precious Metals
Gold and precious metals can help you hedge your investment portfolio against inflation due to their limited quantity. Like other commodities, gold doesn’t pay a dividend, so you own gold in the hope that it’s value will increase.
However, precious metals and gold are not without risk, and they historically underperform the stock market when it comes to returns. Gold is nonetheless popular during times of instability in the markets and is a pretty straightforward investment in that you really only need consider how you intend to gain exposure to gold: You can buy physical gold bullion and store it yourself; you can buy gold futures; you can buy a gold exchange traded fund (ETF); you can buy options on gold exchange-traded funds; you can buy gold mining stocks; you can open a gold IRA… Each option comes with its upsides and downsides – ensure you perform your due diligence before investing.
Here are a few Gold ETFs:
- SPDR Gold MiniShares Trust – GLDM
- Aberdeen Standard Physical Gold Shares ETF – SGOL
Risks of Investing In Alternative Investment Solutions
The standard investing risks apply to alternative investment solutions. Every investment has some type of risk. Before investing in alternative investments, study who is offering the investment, their experience, and background. Understand what you are buying, how long your money will be tied up, and how much you might lose.
Consider the following potential risks before engaging in the investment of any stock market alternative. Even the best alternative investments come with risks such as:
- Illiquid – Alternative investments often tie your money up for extended time periods
- Total loss – Such as a loan default or loss of value
- Unforeseen risks – These are not uncommon, especially in novel investments such as crypto
Apart from alternative investments like real estate, real estate crowdfunding, commodities, gold and cryptocurrency there are other investments that will protect your capital. Although short term bonds, inflation protected bonds and certificates of deposit don’t offer high yields now, they will protect your money from capital losses.
In addition to the 10 alternative investments listed above, here are 4 additional investment alternatives like private equity or venture capital, managed futures, derivatives contracts and collectibles.
Today, I would invest $10,000 in ultrasafe US Government Inflation Bonds. Through April, 2022, the interest payment is 7.12%. The interest rate adjusts every 6 months, in concert with the inflation rate.
No. You can have a sufficiently diversified investment portfolio with just stocks, bonds and cash. We like robo-advisors to streamline your traditional investment portfolio.
Who can buy a particular alternative investment depends on the offer. Some alternative investments allow anyone to buy in. While others are designed for accredited investors. Accredited investors must demonstrate higher net worth, income or expertise, in order to qualify.
Best Alternative Investment Platforms – Wrap up
With an alternative investment platform, you gain some extra diversification in your portfolio and – occasionally – strong returns not available in the standard markets. But you should remember that the best alternative investments are those that add spice to a traditional portfolio. Just as with cooking, you don’t want too much spice.
Traditional investment options allow you to more accurately carve out your specific risk/reward profile and are better – in general – for planning to meet your financial goals. Capital allocated to alternative investments should be “extra” capital, as losses can be substantial compared to those of traditional investments. Seeking returns from an alternative investment platform can be fun but should be engaged in while respecting the risk of alternative investments. After all, the best alternative investments are only the best in regard to your risk tolerance. When in doubt, seek professional financial advice via a financial advisor.
- Speculative Investments – What Percent Should I Invest In?
- How to Buy Bitcoin and Other Interesting Cryptocurrency Facts
- Investing In Real Estate Notes Guide
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