Stock Market Alternatives
When looking for growth in a portfolio, many investors turn to stocks. Over time, stocks and other equities—such as mutual funds—have often performed in the range of 8% to 10%, beating inflation and helping to keep purchasing power intact. But these percentages are just averages. Moreover, since the stock market can be volatile, the risk of loss is high.
Take, for instance, early in 2020 when the COVID-19 pandemic began in the U.S. In February, the Dow Jones Industrial Average moved to an all-time high. But within just the following few weeks, the market fell more than 30%, leaving many investors and retirees with far less value in their portfolios.
Considering that, it is essential to consider stock market alternatives for at least a portion of your portfolio. This can help diversify your holdings and balance out your short- and long-term risk and reward.
Pros and Cons of Investing in the Stock Market
For decades, investors have put money into the stock market in hopes of “hitting it big” with the next Microsoft, Apple, or Google. In some cases, the payoff has been significant; in others, some—or even all—of their original principal disappeared.
If the value of equities increases, it can provide you with a good hedge against inflation. This differs from many fixed rate investments that offer more certainty but low returns. Stocks, bonds, mutual funds, and other types of investments are typically easy to buy and sell. Often, these transactions only require a call to a broker or even just going online and transacting the purchase and sale directly. Within a few days, you can have money in your hands, so equities are typically considered liquid, too.
There are some factors to consider before investing in stocks. One is the risk of loss. Plus, to truly diversify, it is necessary to purchase several different investments to help balance the risk. Doing this can cost a lot.
Further, if the underlying company goes under, the stockholders are the last in line to receive their money back, if any. Plus, commissions that are often charged—in some cases on both the buy and sell side—can reduce the overall return on the investments.
Pros and Cons of Investing in the Stock Market
| Advantages of Stock Market Investing | Disadvantages of Stock Market Investing |
|---|---|
| Opportunity for significant growth | Risk of loss |
| Hedge against inflation | Stockholders are paid last—if at all—if a company goes under |
| Easy to purchase and sell | Can cost a lot to diversify |
| Liquid (easy to convert investments to cash) | Commissions can reduce return |
Alternatives to Stock Market Investing
Several stock market alternatives may be considered if you are looking for a nice return while increasing the safety of your principal at the same time. Some of the most common of these investments can include:
– Real Estate
– Gold and Other Precious Metals
– Peer-to-Peer Lending
Investing in Real Estate
One popular alternative to stock market investing is residential or commercial property. Although it’s not nearly as liquid as stock shares, real estate can provide several enticing benefits, including growth and income.
Real estate can also allow you to leverage your investment dollars. For instance, to purchase $100,000 in stocks or mutual funds, you need to contribute $100,000. But buying a property valued at $100,000 is possible using a much smaller down payment, and then financing the rest is possible.
Going this route can allow you to attain a greater return. For example, if your $100,000 stock market investment goes up to $110,000 in the first year, you will generate a 10% return.
However, if the $100,000 property you purchase rises in value to $110,000 and you submit a down payment of just $20,000, your overall return would be 50%. That’s because a $10,000 increase on a $20,000 investment equates to a 50% return.
Owning investment real estate can also provide you with some excellent tax advantages. For example, if you have a mortgage on the property(ies), you can receive a tax deduction on the interest you pay. Various expenses may also be written off as tax deductions.
It is important to note that owning and managing rental real estate can be time-consuming. There are many different tasks landlords must take on, such as:
– Marketing the property to tenants
– Screening potential renters
– Collecting rent (usually every month)
– Maintaining the property
– Responding to emergencies
One way to reduce or eliminate these activities is to hire a property manager. While doing so could cost you a fee, handing off these responsibilities may still make sense and allow you to focus your time on other things.
If you need cash fast, real estate is not considered a highly liquid investment. It can often take weeks, months—or even longer—to get a property sold to put cash in your pocket. There can also be closing costs and realtor fees, which could reduce your profit.
Considering Gold and Other Precious Metals
Investors have coveted gold and other precious metals for centuries. Because physical metals are in limited supply, their value can rise substantially as more people purchase them. In addition to gold, silver, pallidum, and platinum bars, you could also obtain coins or bullion.
Adding precious metals to a portfolio can help hedge against inflation and provide a way to diversify your holdings. The value of gold tends to rise and fall inversely with the stock market. Gold can also benefit from a declining U.S. dollar and is considered a safe haven during political and economic uncertainty. This has been the case for centuries.
If you invest in physical gold, it will be necessary to store it either in your home or more securely in a bank deposit box. There are also gold and metals depositories that can keep these investments safe—usually in return for an annual charge.
Some factors to keep in mind when you invest in precious metals include:
– While metals may be appealing to growth investors, this is not so for those who are seeking income because metals do not pay interest or dividends
– Metals need to be stored safely to avoid theft or loss
Note that there are ways to invest in gold and precious metals through the stock market, too. These methods can include precious metals mutual funds, individual stocks of gold and metals mining companies, and gold and silver ETFs (exchange traded funds).
Diversifying with Peer-to-Peer Lending
A relatively new way to invest is through peer-to-peer lending. Also referred to as P2P lending, this concept allows individuals to obtain loans directly from others. By cutting out the “middleman,” the transactions can be easier and faster to get.
Peer-to-peer lenders are individual investors who want a better return on their money than what it would earn in a bank or money market account. The borrowers can also obtain loans with more favorable interest rates. So, P2P lending can provide a win-win situation for all who are involved in the transaction.
As an investor, your money is typically pooled with other investors’ funds, and you make loans to borrowers together. You then receive a monthly payment that includes the interest you have earned.
Some of the popular peer-to-peer lending websites include:
– Prosper
– Lending Club
– StreetShares
– Upstart
– Peerform
These websites connect investors and borrowers. The sites also set the terms and the interest rates on the lending transactions. Most of the peer-to-peer websites offer a wide range of interest rate based on the applicant’s creditworthiness.
There are some items to consider before moving forward with an investment in peer-to-peer lending. For example, those seeking loans from P2P websites may be unable to obtain funds from a bank or traditional lender. This, in turn, could increase the risk of default. (You may, however, decide on the credit rating and other parameters that a potential borrower must meet before deciding whether or not to fund a loan).
What is the Best Way to Meet Your Investment Objectives?
There are many different investments to choose from in the marketplace. While stocks are the right option for some investors and retirees, there is not just one single strategy that is best for everyone. That’s why it is recommended that you discuss your situation with a professional financial advisor who can create a plan for you that is based on your goals, needs, risk tolerance, and time frame until retirement.
So, if you would like to set up a time to talk, please contact us at <phone number> or send us an email with any questions that you may have by going to <email address>. We look forward to helping you achieve your short- and long-term financial objectives.
