Most people think of investing as buying stocks, bonds, mutual funds, or exchange-traded funds (ETFs). The more adventurous might think about a real estate investment trust (REIT). Some people also might consider buying stocks of mining companies or investing in a metals ETF as a way to invest in gold, silver, platinum, and other metals.
But what if you want to avoid anything that trades through a broker or online discount broker? That’s where alternative investment opportunities come in. Some of them can make you a lot of money, and some of them may make you a more modest profit. Either way, you’re not trapped into choosing stocks, bonds, mutual funds, and ETFs that are traded publicly.
When you start thinking about alternative places to put your money, you must avoid scams and get-rich-quick schemes. Instead, focus on legitimate investment vehicles that may help you prosper. Here, we’ve selected five types of legitimate alternative investments to consider in 2021.
The fact is, with interest rates at record lows, getting a decent return on cash in the bank is unlikely. This is encouraging savers to look elsewhere for alternative investments to boost their future wealth potential. Whether you’re a seasoned investor looking to diversify or are simply interested in dipping your toes in the water, alternative investments could be just what you’re looking for!
KEY TAKEAWAYS
- Alternative investments have become increasingly popular as a piece of one’s portfolio, providing diversification and potentially boosting returns.
- Traditionally, alternative investments have included commodities, real estate, derivatives, and hedge funds.
- For 2020, while gold and property still make the list, we also consider owning a business and P2P lending.
1. Peer-to-Peer Lending
Peer-to-peer lending, also known as P2P lending, is a relatively new phenomenon. Online P2P services offer loans for businesses, personal use, or anything else you can imagine. If you join the pool of investors who are willing to loan money to others, then the loan can be funded by you once the borrower qualifies.1
There are many P2P lending companies to choose from, including LendingClub, Prosper, and Peerform.1
There is no bank involved in P2P lending. Your money is typically pooled with other investors’ money, and together you make a loan to the individual asking for funds. You’ll then receive a fixed repayment each month that includes the interest you’re owed.1 Often, the returns you get from P2P lending can be higher than those you’d get from standard savings vehicles.
The main risk with P2P lending is that you’re loaning to people who may not have been able to get a loan from a bank or otherwise can’t go through traditional loan outlets, which could increase their likelihood of default. However, you can decide the credit rating and other parameters you’ll consider for a borrower, and you have the choice to fund or not to fund.
2. Real Estate
When investing in real estate, you can buy and own property. You buy a house, duplex, or multi-family dwelling, like an apartment complex, have tenants live there, and collect rent. In many cases, you make a down payment, and the bank finances the rest. You get the rental income and appreciation from the property.
Before you consider buying property, ask yourself if you have what it takes to be a landlord. It can come with a lot of headaches: Things break, accidents happen, and people fall behind on rent. If you want to get the financial benefits of property ownership without all of the responsibility that comes with being a landlord, then you have a few other options.
You can hire a property management company to hand the many responsibilities that come with property ownership, including dealing with tenants, collecting rent, making repairs, and more. That will cost money, of course, but it could be worth it to you in the long run.
You can also form a partnership with like-minded investors to purchase and manage a property together. This can help you spread some of the risks and you may find people who are more knowledgeable than you when it comes to real estate and property management.
Another option is to use an online investment platform that focuses on real estate. Companies like PeerStreet and Fundrise allow you to invest in residential property without having to deal with the responsibilities of being a landlord.2 3 However, these types of investments come with some fees and risks that you’ll want to research before diving in.
3. Gold
Gold is widely regarded as a tangible inflation hedge, a liquid asset, and a long-term store of value. As a result, it is often a sought-after asset class and can be a strong competitor to stocks.
Gold is regarded as a great diversifier because of its low correlation with other asset classes, especially stocks.4 This becomes more pronounced in tougher times when gold can act as a rescue asset.
There are various routes for investors to get 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, if you’re a small investor, it’s wise to opt for direct methods of investing in gold. This usually includes buying gold bullion—coins, bars, or other physical forms of gold. An allocation of 5% to 10% in gold is considered healthy for an individual’s portfolio. Also, it’s vital to learn about the factors that govern gold prices when it comes to investing in gold.
An alternative way to invest in precious metals is through exchange-traded funds (ETFs), gold mining stocks, bonds, futures, and options. For beginners to investing, owning the physical bullion is the safest and simplest option. It’s generally thought that a 5% to 10% allocation to gold is a wise way to hedge and balance your portfolio.
Depending on where you live there may or may not be tax implications to owning gold.
Generally, gold is a fantastic way to diversify your portfolio because it doesn’t tend to correlate with any other investment asset class. Therefore, when equities are tanking, the price of gold usually stays strong.
4. Owning Your Own Business
You can use your money to invest in your own business, which has the potential to produce the highest returns of all your investment choices. It can also fail and cost you a lot of money and sorrow. However, your businesses can produce a steady income and grow over time.
Some businesses have very low startup and ongoing costs. These include virtual or online businesses, like teaching, consulting, coaching, and IT support.
One way to approach this is to only put part of your money into a business and invest the rest elsewhere. This approach can save you some sleepless nights.
Another approach is to create a part-time business, something you can do in the evenings and weekends. That way you don’t have to give up the security of your regular job, and you will be making extra money.
5. Equity Crowdfunding
If you don’t want to own your own business, you may want to consider owning part of someone else’s. Startup companies that need money can offer shares of their companies on equity crowdfunding websites. These sites include AngelList, CircleUp, SeedInvest, and Wefunder, and more.
If you invest in a company over an equity crowdfunding site, you own part of it and will be rewarded if the company succeeds. The risk is that if the company fails, you lose part or all your money.
There have been some equity-funding success stories, such as Cruise Automation. This company develops self-driving vehicle technology and was largely developed through equity crowdfunding.5 General Motors bought the company in 2016, creating profits for investors and giving an air of legitimacy to the crowdfunding industry.6
You can start investing your money in equity crowdfunding with just a few hundred dollars.7
Your investment portfolio should be diversified. This means you should consider a variety of stocks, but it also means you can invest in non-stock investment vehicles. Consider where your money would grow best based on your tolerance for risk. Remember: the higher the risk, the greater the potential rewards.