Stocks, bonds, savings accounts and certificates of deposits are by far the most common form of investing. Following these is real-estate. Some people, however, have reservations investing in any of these categories. Real estate might be too time consuming, and often ends up incurring higher costs than anticipated. CDs, savings accounts and bonds don’t return enough, sometimes even under-performing inflation. The stock market is volatile and has left many people feeling burned from rapid swings and long bear markets.
When none of the typical investments appeal to you, you might go looking for other ways to make your money work for you. What you’re likely looking for is something that yields more than bonds or savings, but is safer than stocks. Or perhaps you’re looking for something that outperforms even stocks. One word of caution- there’s truth to the saying “if it sounds too good to be true, it probably is”. While there are some legitimate ‘alternative investments’, none of them are that pot of gold at the end of the rainbow. Many claim to be tho. If there were something that would beat the return stocks with the stability of bonds, you can bet that the entire world would be flooding to it.
If used wisely, however, some alternative investments can help you diversify your investments. Perhaps they will absorb some of the roller-coaster ride that you’ll be getting in the stock market. Or perhaps you will find an investment that outperforms stocks- just know that it will almost certainly also be riskier than the stock market. There will always be very close correlation between risk and reward.
Baseball cards, art, fine wine, jewelry, historical artifacts are all collectibles. As with all investing, the theory behind investing in collectibles is that they will be worth more in the future. Sometimes this is true. Several famous artists’ work was practically worthless during their own lifetime, but is now worth a fortune. Buying their work before they died would have made you a fortune. A rookie baseball card of a now all-star would definitely have increased in value.
Collecting carries significant risk and other drawbacks, however. Remember when TY beanie babies were hot? People were filling rooms with them, and selling them on E-Bay for far more than their retail price. It was taken for granted that they would double or triple in value in no time. How could anybody be so dumb as to NOT invest in TY beanie babies? Oops. That bubble popped. There are a few beanie babies that are still selling for thousands, but they are the exception. Same goes for many other collectibles.
The value of collectibles is based on the general population’s interest, which is more fickle than even the stock market. Artists’ popularity waxes and wanes. All-stars soon become forgotten. Your particular historical artifact may not interest many people, or may not be unique enough.
Besides the downside risk, collecting can also be incredibly time consuming. Figuring out and tracking down the collectibles that have the best chance of increasing in value takes lots of study and research. It often means visiting auctions, garage sales, flea markets and dealers. Successful collecting can easily become a full-time job, at which point it’s not investing anymore, but rather a career.
When you put your money in CDs or bank accounts, the return on your investment ultimately comes from loans that are made with your money. The problem is that the bank is a giant middleman taking a giant cut of the profits. Person to person (P2P) lending tries to solve this problem by facilitating loans directly from the investor to the borrower, cutting out the middle man. The investor then gets a higher rate of return and the borrower gets a lower interest rate.
The two biggest players in facilitating P2P are Prosper and the Lending Club. I have not personally invested in P2P lending, but based on my research, P2P lending is one of the better alternative investing. When I get around to trying P2P lending, I’ll write about my experience.
Of course, P2P lending also has its drawbacks. That big fat middleman bank does offer a service for the giant cut of the profits it is taking. It absorbs all the risk of lending. You don’t have to worry about the borrower defaulting or making late payments. With P2P lending, however, you are completely liable for borrower defaults.
For now, it seems that when you spread your money across different loans, you still consistently earn a return far higher than traditional bank products. P2P lending, however, is still new to the scene. It will be interesting to see how it holds up when the economy takes a bad turn. When people’s incomes start getting squeezed, its likely that the first bills they’ll default are the ones that are held by other individuals.
Lately, the financial industry has been very creative with their investment products. Large trading platforms have been set up to invest in Forex (foreign currencies) and commodities. The problem with these two categories is that, unlike a business, they do not generate value or income. Rather, as with collectibles, you are capitalizing on fluctuations in their value. There are guaranteed to be losers and winners, and the losses will equal the wins. The only way to make money in these categories is by being better than average. At least with collectibles, people seem committed to continue pumping money into the category to maintain the potential of overall return. Commodities and Forex, however, are a zero sum game.
Speculation vs. Investing
Perhaps the biggest problem with alternative investments is the tendency towards speculation. Not all alternative investments are speculative, but many are. One could correctly argue that there is speculation in the stock and bond markets too, but at least at the very core, the bond and stock markets are based on real loans and real businesses making real money.
One to remember with alternative investing, or all investing for that matter- there’s no get-rich-quick investments. There’s that direct correlation to between risk and reward. Every investment has downsides. Either the investment will cost you in lower yields, higher risk, or time.
While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.