Investopedia - Prableen Bajpai- January 19, 2016
What flashes across your mind when you think of conventional investment options? It would probably be stocks or bonds, or maybe a fixed deposit, as they have been the all-time favorites among investors. But times have changed and so have investors, who are exploring new investments outside the stock and bond markets to make their portfolios more rounded and complete. While some of these so-called alternative investments are nearing the mainstream now, they are still lesser known. We take a look at some alternative investment options for 2016 beyond stocks and bonds.
Gold isn’t the darling of many in present times, but that doesn’t undermine it as a great resource in hard times. Gold, often quoted as an effective inflation hedge, is a tangible liquid asset which is a viable alternative to stocks. In fact it is seen as a great diversifier primarily because of its historically low correlation with stocks and other asset classes. The correlation between gold and stocks often tends to be positive in good times but during crisis, the contrary comes into play. There are various methods to invest and hold gold, some of them being physical form such as bars, coins or jewelry, gold exchange-traded funds, and gold mutual funds investing in companies indulged in gold mining or even futures and options. Overall, irrespective of the form, an allocation of 5-10% towards gold is considered as ideal for an investor’s portfolio. (See also: What Moves Gold Prices?)
The term “social lending” depicts an innovative process that facilitates borrowing and lending outside the structure of regular financial institutions. Often termed as peer-to-peer lending, the system offers the advantage of borrowing and lending at rates which are beneficial for both parties. The borrowers get loans at interest rates lower than banks, while lenders are able to earn a return higher than on bank deposits on the money lying idle with them. This customized process has become very popular in recent years. In the absence of an authorized body managing the transactions, the risk of default does emerge as one of its disadvantages. The same can, however, be managed to a certain extent by choosing more than one such platform to lend out money. Some of such marketplaces are Lending Club, Prosper, Upstart, and SoFi. These platforms also have their own recovery mechanisms in place to combat cases of default. (See also: The 7 Best Peer-To-Peer Lending Websites)
The 1911 landmark decision by the U.S. Supreme Court opened the gates for the life settlement industry which exists today. The ruling gave insurance policy holders the “right of transfer of ownership” to a third party, which could be totally unrelated to the policy holder. With this decision, a new form of investment was born, known as life settlement. This product is unique in a many ways – it is totally uncorrelated to any other financial products or economic events and is risk-free to a large extent. The life settlement product is explained by the SEC as: “In a 'life settlement' transaction, a life insurance policy owner sells his or her policy to an investor in exchange for a lump sum payment. The amount of the payment from the investor to the policy owner is generally less than the death benefit on the policy, but more than its cash surrender value. The dollar amount offered by the investor usually takes into account the insured’s life expectancy (age and health) and the terms and conditions of the insurance policy.” People exercise the choice to exchange their insurance policy for cash due to difficulty in paying premiums, change in family circumstances or for cash requirements. Such transactions of sale are facilitated by life settlement brokers and hence involve commissions. Make sure you understand the product well before investing (see for example: SEC Investor Bulletin on Life Settlements). (See also: An Introduction To Life Settlements.)
The subprime crisis hit the real estate sector hard, but it has bounced back in due course. In fact real estate emerged as the top choice among millionaire investors as an alternate investment per a Morgan Stanley Wealth Management Investor Pulse Poll in 2014. While everyone looks to buy a house for living purposes, real estate offers a good opportunity to invest outside the stock market, although it is highly linked to the status of an economy. Investing in real estate doesn’t necessarily mean that an investor has to buy a house or commercial space and lease it to earn rent. Investments can be made in indirect ways as well, for example through a real estate investment trust (REIT), which is accessible with a small ticket size.
This option may sound too adventurous to many, but it exists and can be lucrative too. Starting from bitcoins there are hundreds of cryptocurrencies available for trade, i.e. buying and selling. Those who are keen to experiment with this option need to understand the risks associated with it. One of the easy ways is to buy on an exchange through payment options ranging from debit and credit cards to cash or wire transfers, but a lot would depend on the jurisdiction your location falls under. Buying on an exchange requires a place for storing such currency, which would normally be a digital wallet on your laptop or another device. (See also: Basics For Buying And Investing In Bitcoin)
The Bottom Line
Different investment options come with different risks of return, and understanding your own risk appetite is very important before you pick any investment product. Investments can be boring to adventurous, but all are ultimately done with the prime motive to earn a return on the initially invested capital. So be it stocks or bitcoins to collectibles, as an investor know your objective, understand the product and then take a plunge. Happy investing!