I write about personal finance and share strategies for getting ahead financially and in life.
It can be easy to think that investing in stocks is one of the only ways to earn consistent passive income. Stocks and bonds should play a part in your portfolio. Although you may consider holding alternative assets to reduce your downside risk during a stock market correction.
Most stock market alternatives are physical assets and are privately-owned. Their market value may not be directly correlated to the performance of a stock market index. These assets tend to be illiquid, meaning you may hold them for several years before selling for a profit.
If you don't want your entire nest egg invested in the stock market, you should consider some of these assets instead. Like any investment, perform your due diligence before you invest.
Owning residential or commercial rental property is probably the most popular stock market alternative. Property values are influenced more by factors like the local job market than the gyrations of the S&P 500. Monthly tenant payments let you earn a steady passive investment income.
You may decide to buy a local property that you can manage yourself or hire a property manager. However, this investment method requires a lot of cash and time.
A low-effort way to invest in rental property is with crowdfunded investing. You can start investing with $1,000 or less on some platforms. You get exposure to various commercial or multifamily apartments across the United States.
With crowdfunded real estate, the investment company manages the portfolio, and you can earn landlord-like annual returns between 6% and 12%.
Another alternative real estate investing idea is investing in farmland. People will always need to eat food and farmers can lease land from you. Farmland investing also doesn't require you to deal with tenants or property upkeep.
You might invest in land across the United States. To get international exposure, consider buying a stake in a Latin American coffee or cocoa plantation. Investing in different geographic regions and crops helps you hedge against drought and varying commodity prices.
In addition to farmland, you can also search for timberland or undeveloped parcels that you can flip.
If you have extensive real estate experience, a natural next step can be investing in property tax liens. You pay the unpaid tax liens for a property, typically at auction.
In time, the property owner repays you with interest at a rate set by the taxing authority, usually a county or municipality. However, you may be on the hook for future charges if the owner doesn't pay up but you would be able to foreclose on the property.
Owning physical gold and silver bullion can also be a smart move. Both of these metals have been used currency for much of human history. Holding gold or silver currency can be more stable than buying jewelry.
One precious metal investing option is buying rare coins like Saint-Gaudens double eagles or Morgan silver dollars. Coins with a numismatic grade between MS-60 and MS-70 are in mint condition and can be the most valuable.
It's also possible to buy gold or silver bars. These bars can be held in a well-guarded vault or in your own home. Your bars should have a 0.999 purity level.
Precious metals can increase in value as dollar-based assets become out of favor. You may not earn steady dividend income like a gold royalty stock. However, holding physical gold or silver lets you directly invest in the commodity instead of relying on the performance of a mining or streaming company.
If you're more adventurous, metals, including platinum and palladium, can be a good option.
Investing in blue-chip artwork can be another stable way to earn passive income. During the 2008 financial crisis, art only dropped between 10% and 30%, on average, while the S&P 500 declined 57% from peak to trough. While asset values may fare differently in the next recession, fine art can be an exciting way to produce long-term wealth.
Art investing can range from Impressionists to Modern Art. Certain artwork categories will be more resilient than others.
Like other alternative investments, it can take years for artwork to appreciate in value. If you can hold a piece for several years, the likelihood increases of earning a profit.
Believe it or not, fine wine outperformed the S&P 500 in 2018, according to Barron's.
You may have a competitive advantage for finding the best investments if you love wine. As you know, some years are better than others.
Vintage wines, those made with grapes from the same harvest year, are a good starting point. Next, you can focus on finding rare wines. Buying wine in its original case tends to be more valuable than individual bottles.
While most cars continue to depreciate, certain classic cars withstand the test of time. Maybe you want to find a car similar to what your grandfather dreamed of owning in his younger days.
You can get an idea of which classic cars are suitable investments by watching car auctions. Pay attention to if the most valuable cars are in original or restored condition. Try searching for cars with a detailed owner or maintenance history.
If you have a love for antiques and collectibles, you may also enjoy owning valuables from yesteryear. Ideas include furniture, silverware, Lionel train sets, Star Wars memorabilia.
The best starting point is buying items with values you are familiar with. As you gain experience, you can begin branching into other types of antiques.
Most publicly-traded bonds are for large businesses or governments. You can also lend directly to small businesses with asset-backed loans. The company can use the funds for actions like equipment financing or buying inventory. Average repayment terms are between 12 months and 36 months.
Lending directly to businesses lets you earn a higher yield than most investment-grade bonds. It's possible to earn a 5% annual yield with small business bonds. The yield for the Vanguard Total Bond Market Index Fund is only 1.08% (January 22nd, 2021).
Unlike the bond index funds that you might hold in your IRA, small business bonds do not have a fluctuating share price. If the share price drops more than the annual yield, you have a negative return. With small business bonds, you earn a fixed yield but only lose money if the borrower defaults on the loan.
Another bond-like alternative is peer-to-peer lending for personal loans. Your potential income depends on the borrower's risk rating. Lower risk loans have a lower yield but are less likely to default. Most loan terms are either 36 months or 60 months, so this is a long-term investing idea.
Before lending money to an individual, first look at their credit history, annual income, and loan purpose. The applicant might be using the loan to consolidate debt but may also use it for home improvement or to fund a vacation.
Changing interest rates and credit cycles can influence your potential returns. Like small business bonds, you can earn consistent monthly income. Historical returns are between 4% and 7% but can be higher.
One of the riskiest alternative assets can be investing in startup companies. If you like to dabble in penny stocks, IPOs, or private placements, you may like this idea. Funding a company in its earliest growth stage can produce high returns if the business succeeds.
To reduce your downside risk, you may decide to invest small amounts of cash in multiple startups. Your potential income can be less for successful investments. Proper asset allocation prevents you from losing a large fortune by only investing in a few ideas.
If you're looking for an alternative to the stock market, one of these options may be a good choice!
Create your free account to unlock your custom reading experience.