Top Alternative Investments To The Stock Market – Investopedia
Discussions about investing are seldom complete without the mention of stock markets—the gains, risks, and opportunities. Sure, stocks and linked products like mutual funds are a part of many investor portfolios, but not all. Many investors are wary of the stock markets for a number of reasons and are thus looking at other investment options. There are a wide variety of products for such investors to explore, and these products help to balance out the portfolio by adding different flavors, reducing volatility, and enhancing performance. Below are some alternatives to stocks:
1. Real Estate
As an investment option, real estate has grown tremendously in popularity over the last few decades. While the 2008 crash in the US dissuaded many from investing in real estate, the scenario has changed rapidly. According to a Morgan Stanley Wealth Management Investor Pulse Poll in 2014, real estate has emerged as the top choice among millionaire investors as an alternative investment.
The popular ways for an individual to invest in real estate are to buy a residential or commercial property to earn rental income, to become a member of a real estate investment group, or to invest via a real estate investment trust (REIT). Buying a property to rent out requires a huge initial capital investment, finding the right choice of location for lucrative rentals, regular upkeep of the property, and taking care of the expenses such as property tax or mortgage payments. So, if earning a rent is your objective from a real estate investment, a real estate investment group might be a better option. It is an organized way for a company to buy or construct properties that are then sold to individuals looking to invest for rental income. These companies take on the headache of finding the right tenant, maintenance, and other issues for a fee (of course), which is usually a certain percentage of monthly rentals.
If you are interested in buying property but don’t have deep pockets to invest in one or want to avoid the hassles of being a landlord, REITs may be just right for you. REITs operate like stocks in that they are accessible through major exchanges for buying and selling. They are offered by an entity that receives special tax concessions on distributing 90 percent of the taxable profits as dividends. Investments by REITs are not limited to residential apartments or house; they include malls, retail, and office spaces. On the flip side, the nature of REITs is somewhat similar to stocks. (For more, see: Key Reasons To Invest In Real Estate.)
2. Bonds
Though bonds are more of a traditional investment than an alternative investment, bonds and are classic substitutes to the stock market, particularly during turbulent times for stocks. Bonds are a debt investment commonly referred to as “fixed-income securities” as they offer a fixed (or variable) interest rate for a certain time period. There are many variations of bonds depending upon the issuer, riskiness, credit quality, and duration. Many of them are traded on exchanges, while the rest are restricted to over-the-counter trading. Some of the common categories are corporate bonds, municipal bonds, federal government bonds (the Treasury bond in the US), zero-coupon bonds, and junk bonds. (For more, see: Bond Basics Tutorial.)
3. Gold
Gold is a tangible inflation hedge, a liquid asset, and a long-term store of value. As a result, it is a sought-after asset class and a strong competitor to stocks. Gold is regarded as a great diversifier because of its low correlation with other asset classes, especially stocks. This becomes more pronounced in tougher times when gold often acts as a rescue asset. There are various routes for investors to take exposure to gold like buying and holding physical gold such as coins or bars, gold exchange-traded funds (ETFs), gold accounts, or investing indirectly through gold mining stocks or futures and options. However, as a small investor, it is best to opt for direct methods of investing in gold. An allocation of five to 10 percent in gold is considered healthy for an individual’s portfolio. (For more, see: What Moves Gold Prices?)
4. Social Lending
Social lending or peer-to-peer lending is an innovative investment method that exists outside the standard financial system. It is not governed by any financial intermediary or bank. An individual lends to a peer and receives interest in return. This system has flourished as it is customized to the needs of lenders and borrowers. Both parties can benefit as borrowers are able to get a loan at a lower interest rate than through banks, while lenders earn more returns than in options with similar risk. The risk of default is the biggest risk in such an arrangement, but this can be managed by splitting the loan amount through platforms such as Lending Club or Prosper. Moreover, these websites also have recovery mechanisms in case of default. (Related reading, see: Peer-To-Peer Lending – Determining The Future Of Banking Across The World.)
5. Life Settlement
Life settlement investment is a slightly offbeat investment product that provides diversification because it is unaffected by erratic oil prices, fluctuating interest rates, fiscal policies, or other economy-related factors. It involves buying a person’s life insurance policy for a lump sum that is more than its cash surrender value but less than the death benefit. The person who bought the policy continues paying the premium and eventually receives the “death benefit” upon the death of the insured. The amount to buy the policy depends on the life expectancy of the insured. The investment works well for both the original policyholder and the buyer, but it is not risk-free and involves commissions. Make sure you understand the product well before investing (SEC Investor Bulletin on Life Settlements). (For more, see: An Introduction To Life Settlements.)
The Bottom Line
There are many more diverse investment options available to investors from basic products like certificate of deposits (CDs) to nontraditionals like collectibles and wine to investing in yourself in the form of education, courses, or training to help you excel in your career. What you choose to invest in is important, but a clear understanding of the product and your objective is even more important. As Warren Buffett says, “risk comes from not knowing what you’re doing.”
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Top Alternative Investments To The Stock Market – Investopedia
