“The individual investor should act consistently as an investor and not as a speculator.” Benjamin Graham.
For too long, the stock market has been touted by typical financial advisors as the place to invest your money. So pervasive is this notion, that most of the populace doesn’t really consider alternative investments. In reality, the stock market is far from your only option (and we certainly wouldn’t call it your best option either).
So what is the best way to invest money?
The answer will depend on your desires, and we’re here to give you some options, that way you can discover the best investments for you. It’s long been assumed that more risk equal more reward, but that is a dangerous adage to follow. To that, we say that more risk simply means more risk—and how much of your retirement or savings are you really willing to lose?
It’s time to expand your options well beyond Wall Street, and in the process minimize your risk. Stocks and mutual funds are ultimately just a game of speculation, and bonds range anywhere from “risky with decent returns” to “safe with flimsy returns.”
If you have a zero tolerance policy for lost money (as we think more people should be), here are some alternative investments with more certainty.
6 Alternative Investments
1. Life Settlements
If you’re most interested in asset growth with minimal risk, consider a life settlement. This offers you a way to participate in the secondary market for life insurance policies, as these policies are private property, and have thus been considered an asset class since 1911.
Just as property deeds can be bought and sold, so too can life insurance policies. Through this secondary market you can purchase policies that are unwanted, unnecessary, or unaffordable to elderly policyowners. We think this is a clear “win-win” scenario.
Not only can a policyowner nearing life expectancy turn their death benefit into a living one, investors are able to purchase an asset with a certain future value (as opposed to one with unknown growth).
Unbeknownst to the public, most investors included, life settlements have been used by institutions for decades. Here are some of the best features of this investment:
- Non-correlated returns: your investment won’t be correlated to any interest rates, housing prices, political events, or other outside influences.
- Minuscule Risk: We’re talking practically zero risk. Life insurance, and thus life settlements, are based on actuarial math, not speculation. As these settlements are purchased at a discount, and costs such as future premiums are factored in, losses are highly unusual.
- Solid Returns: It’s not unusual to see annual returns in the low double digits, according to this study, though results will vary.
- Emulates Success: If you’re still uncertain, follow the lead of the wealthy (there’s no better group to take financial advice from). According to this list, Berkshire Hathaway, Bill Gates, and major institutional investors have hundreds of millions socked away in life settlements.
- High Certainty: There are few financial institutions with the strength and certainty of life insurance companies. And when it comes to life settlements, only policies that are seasoned and vetted are put on the market. Not to mention, the benefits are quite literally insured.
As with any investment, it’s important to determine whether it’s a good fit for you. Therefore, you must consider some of the “cons” to life settlements. Consider:
- Requirements. In order to invest in life settlements, you must either be an Accredited Investor or an institution. If you’re new to investing, or are still building your wealth, this option isn’t accessible yet.
- Not liquid. Because life settlements are tied to a death benefit, the exact time frame of the investment is uncertain. And in the meantime, you can’t access those funds.
- Uncertain Time Frames. A typical investment is around $100k, and can be tied up on average 7-10 years. As there isn’t much flexibility, patience is a must.
2. Commercial Bridge Loans
If you’re looking for cash flow, you must know about bridge loans. Becoming a private lender of bridge loans can offer immediate, steady, and substantial income. And not only that, it provides an opportunity to capitalize on real estate without becoming a landlord.
Some other names for bridge loans are “mezzanine lending,” “hard money loans,” or “rehab loans,” and offer temporary financing to investors for short periods at higher-than-usual interest rates. The reason real estate investors are so eager to secure these loans is the difficulty of acquiring financing with less-than-perfect credit. By investing in carefully screened (we cannot emphasize this enough) bridge loans, you can obtain reliable income with high single-digit or possibly double-digit returns. And the risk is minimal.
Here are some of the best benefits of becoming a private lender:
- Reliability: Monthly payments often come directly from the company that sources the loan, rather than the borrower.
- Security: Assets are backed by existing (i.e. “real world”) assets, and often secured by first position deeds of trust. Loan-to-value is typically lower than 65%, which provides some wiggle room for market fluctuations.
- Low Risk: Private investment mortgage funds can provide income for years, yet the underlying notes are held for only a year or so in order to minimize risk in the event of a market downturn.
- Healthy Returns: Private lenders typically earn a minimum of 7% and a maximum of around 14%. This varies based on whether or not you’re an Accredited Investor, and available options.
- Flexible: Notes and funds from a bridge loan can be held in a self-directed Roth IRA, and funds can usually be rolled over into another loan for continued cash flow.
And of course, it’s important to consider whether or not this is a good investment for you. Consider the cons of commercial bridge loans:
- Learning Curve. There is a lot of information to digest when learning about bridge loans. This isn’t something you can jump into casually. Research is of the utmost importance, as mistakes can be costly.
- Not All Companies Operate With Integrity. The companies you choose to work with should make it their priority to protect your principal. Unfortunately there are a number of less-than-reputable companies who will take advantage of lenders.
3. Direct Real Estate
Cash-flowing rental properties have only become more popular in the last decade or so. Real estate is a time-tested way to build wealth, and you have some room to get creative, too!
While being a landlord is a serious commitment, it’s not without its rewards. Active real estate investing requires you to do a lot of research up front in order to find the right locations, yet provides a steady monthly cash flow once established.
What’s especially good for those who want to invest, but are not (yet) Accredited Investors, is that you don’t have to be one! You can get into real estate even with a small investment.
Here are some pointers for getting started:
- Start small. If you’re just dipping your toes into real estate, you could perhaps start by renting out your old home when you move into a new one.
- Crunch the numbers. You have to focus on cash flow if you want to make it as a real estate investor. Don’t be a speculator! Don’t assume or count on appreciation, make sure the property is cash flowing even without it.
- Find a mentor. Good advice and mentorship is invaluable. Don’t presume to know it all, mistakes in real estate can be costly. Seek wisdom from as many professionals as you can, from an attorney to a great handyman.
- Be in a position of cash. If there’s one thing you can expect from real estate, that’s the unexpected. Make sure you always factor that into your calculations.
Of course, there are downsides to real estate investing that you should be aware of, such as:
- Round the Clock Commitment. While it’s possible to hire property managers, those starting out will likely find themselves in the position of landlord. As we mentioned above, the unexpected will happen, and it will happen outside of “business hours.”
- Life Happens. Sooner or later, you’ll have tenants who can’t make rent, and in unusual circumstances (as we’ve seen in 2020), that could apply to multiple tenants at a time. You must be prepared to deal with these difficult situations.
- Market Fluctuations. It’s important to stay on top of the markets in which you invest. Not only should you know the housing market, you need to know about how the economy, politics, and job markets will effecting housing.
4. Fractional Real Estate
Another opportunity for Accredited Investors: direct investing in commercial real estate through private lending. Typically, this amounts to commercial apartment buildings, offering monthly cash flow. In addition, these types of investments offer equity. And it’s a win-win, allowing real estate investors to avoid the most common, and costly, mistakes of real estate investing.
The downsides include:
- Restrictions. This is another opportunity reserved for Accredited Investors, and therefore may not be available to you right now.
- Speculation. Without a strategy, fractional investing can verge on speculation, as you’re putting faith in a location that you might not be as familiar with.
- High fees. There are a lot of associated fees with fractional investing, as you’re paying for the convenience of partaking in a deal with minimal-to-no responsibilities.
5. Peer Lending
Also called peer to peer lending, this type of investment allows you to cut out the middle man. Websites like Lending Club and Prosper allow you to lend money without involving the banks or credit card companies.
If you’re just starting out, consider this an excellent option! Through peer lenders, you can quickly and easily invest in a hands on way with minimal funds. We’re talking just a few hundred dollars. This way you can invest in a small portfolio for just $25 a loan. And returns are generally in the high single digits to low double digits. Diversification is simple with P2P lending.
You can also expect this to be a low-risk option, because the platform you choose acts as the overseer. In other words, it’s not like lending money directly to you friend and hoping they pay you back.
When considering whether peer lending is right for you, be aware of the drawbacks:
- Semi-Liquid. It’s possible to get your money out when you want, but can be a lengthier process than may be convenient.
- Non-Guaranteed Rates. Although you’ll be informed of projected rates, these are not guaranteed and can vary greatly on a number of factors.
- Risk. Although there are ways to minimize risk, some loans are high risk and you could lose your money. Don’t chase a high return unless you fully understand the risk (remember, risk is the likelihood of loss!).
6. Cash Value life Insurance
And finally, we’ve arrived to our favorite. To clear the air: life insurance is not an investment. We like to think of it as a place to store cash while protecting your family or business. This is a high quality asset that gives you liquidity, control, and leverage. It’s so powerful that even banks and other corporations are heavily insured (by having policies on employees).
In fact, would you believe that the banking system is heavily dependent on these policies? Banks now hold over $160 billion in life insurance policies.
When properly structured, whole life insurance is particularly powerful if one or more of the following is true:
- You’re a saver. If you already have a habit of saving, whole life insurance premiums will be a piece of cake. With a policy, you can build long-term, liquid savings that outpaces inflation and beats bank rates.
- You value leverage. The cash value on your policy is some of the best leverage you can have. Life insurance companies allow you to borrow against your policy, so while your cash value grows you can partake in lucrative opportunities, or just cover major expenses.
- You have volatile investments. The typical investment advice is to balance your stocks with bonds, yet we think that life insurance offers more desirable benefits and increased flexibility.
- You’re looking to increase protection. The death benefit is powerful for replacing income in the event of a tragic loss, and yet term insurance has less than a 1% chance of paying out. Converting to a whole life insurance policy keeps your protection in-force.
- You want a legacy. Multi-generational wealth is achievable through whole life insurance through the use of trusts. In addition, you can insure nearly any person in good health, regardless of age.
If you’re interested in learning more about the benefits of whole life insurance, we cover the pros and cons in this article.
There’s no one answer. It’s up to you to decide which investments are worth your time and energy. We hope that you can see beyond Wall Street to all the other options available to you. Take this list and see which of these options might be a good fit for your portfolio overall. It’s important to remember that you’re in control, you don’t have to follow typical advice because you feel as though you’re without options.
To get in touch with a Prosperity Economics Advisor, who can offer more guidance, click here.