Most of us tend to think about traditional investments. We think about the stock market. And we end up investing in the stock market. It’s the safe bet.
For some of us, our parents taught us it’s the only way to make money. We have friends who made a fortune on Apple or Netflix.
Investing in the stock market has its ups and downs, but it’s generally a best practice. If you avoid picking stocks and invest in index funds instead, most advisers would applaud your choices.
After all, the Dow Jones achieved annualized returns of 7.9% from 2005-2015. That’s a feat achieved with the Great Recession stuck in the middle.
With a million dollar retirement account, the stock market is a pretty safe place to double your money within 10 years. I don’t think you’d find too many people out there to disagree with you.
Obviously, your savings account is generally a terrible place to invest your money. After all, the national average interest rate on a savings account is currently only 0.06%.
Alternative Investments, What Are They?
However, what if we’re missing something? Investing in the stock market certainly can’t be the only way to build wealth. Not everyone is Warren Buffett. Businessmen around the world invest in real estate and golf courses. Many athletes choose to pour their money into restaurants.
ESPN even made a film documenting the bad investments of professional athletes as they squander away their fortune.
So if you don’t want to follow in the footsteps of real estate, golf courses, and restaurants, what else is out there?
Last year, my father started talking to me about Master Limited Partnerships or MLPs for short. He had just returned from his annual tax appointment. Most of the time, taxes are an unexciting affair. If you’re a customer of HR Block, you know the drill – walk in, a person types in a bunch of numbers, you setup direct deposit on your refund, and you’re all set.
My dad’s story was different last year. He had started investing in an MLP which he bragged had earned him quite a bit of money. He told me how his tax accountant was annoyed at the paperwork involved.
That’s when I started wondering about my own investment strategies. What are some of the other options out there? Have I prepared myself for sticking money in anything but the stock market?
Don’t get me wrong. I’ve heard stories of people buying gold and keeping it in a safe deposit box.
And when I was a kid, I grew up listening to the commodity reporting on the morning radio. That was my morning ritual.
However, as I’ve grown older, I haven’t ventured out into that world just yet. I don’t know that I will.
Throwing my doubts aside, alternative investments are an interesting bag. On the one hand, you have the oft-demonized hedge funds. On the other, you can actually invest in your morning cup of joe.
Master Limited Partnerships
MLPs are kind of hard to explain. You already know HR Block will hate your guts if you walk in with one.
You would typically find MLPs in the energy sector. For example, the oil boom has pushed MLPs toward the mainstream.
You can find and buy them on public markets and they’re an income generator. However, instead of a 1099-DIV, you receive a Schedule K-1.
If you show up at your tax appointment with a Schedule K-1, your tax preparer will give you the look. When they’re done complaining, they’ll slap you with a large tax preparation fee as well.
If you want to read in detail about MLPs, I suggest reading this article. There is no possible way I could explain MLPs any better.
Cell Phone Towers
In a past life, I worked for OnStar. If you have a car made by General Motors, there’s an OnStar system in your rear-view mirror.
For awhile, OnStar was partnering with Verizon for cellular service (but since lost the deal to AT&T).
If you’ve seen Verizon commercials, you know they brag about the best coverage. Even though I’m not a customer (T-Mobile represent), I really do believe that – Verizon’s coverage is unbelievable.
But how do they achieve such outstanding and wide-reaching coverage?
To do that, Verizon needs to lease cell phone towers in all kinds of locations. Sometimes these locations are fairly remote – think farm field in the middle of nowhere.
If you’re lucky enough to have land in key places, you may be approached by a cell phone carrier. Cell phone carriers want to lease your land. In some cases, a lease can be worth $1,500 to $2,500 per month and possibly more.
Leasing your land to a cell phone carrier isn’t something everyone can do. To even get started, you guessed it, you need to own a bunch of land. However, if the option is available, you might want to give it a chance.
Real Estate Investment Trusts
If you’re an income investor, you might already be familiar with REITs. If you haven’t heard of them, keep reading.
REITs can offer high dividend yields which provide an opportunity to generate a lot of income. For example, Arlington Asset Investment yields 16.87%.
Basically, an REIT is focused on real estate. They invest in and own properties around the country. If they don’t invest in property, they invest in mortgages.
REITs became a thing in 1960. Congress gave birth to them the only way they know how, by passing a law.
I know what you’re thinking. I drink coffee everyday, and now I can invest in it? Amazing.
I’m with you. I drink iced coffee on a daily basis – that sweet, sweet liquid gold. However, maybe like you, I had no idea coffee made its way into commodities. Maybe it’s because I’m too young?
Like many commodities, there is great risk in coffee.
It’s sort of like watching gasoline prices while you drive to work during the week. If there’s any volatility in the weather or the political climate makes an area at risk for conflict, prices will be effected.
On top of geographical risk, there’s a monetary aspect as you might have guessed. The entry fee is steep.
First of all, you’ll need a stake of at least $4,900 to get started. When you add in supply and demand, it becomes a risky endeavor. Case in point, you may have noticed Starbucks raised their prices in 2016 due to rising coffee costs.
Finally, there are better ways to bet on your caffeine habit. Buying shares in Starbucks will currently net you a 1.8% dividend. Plus, the stock split in 2015.
With Starbucks adding 12,000 new locations within the next five years, it could end up being a great investment.
You might know forward contracts as futures trading.
The easiest way to understand forward contracts is to look at airlines. If fuel prices tend to rise over time, an airline could purchase fuel for the entire year at the current price.
If you invested in coffee, you’d be taking a risk on futures trading.
Although it’s an alternative investment option, I would shy away from futures trading.
To begin, it’s recommended you have at least $50,000 to open an account – although it’s possible to open an account for as little as $3,000.
On top of that, there are times when your assets can be frozen and you will be unable to get your money out until the next day. This is known as limit up or limit down.
Essentially, the markets protect themselves. An episode like the Great Recession is less likely to happen.
If you don’t have the time to learn and study futures trading, I would shy away from it. Much like day trading, you won’t make money taking wild guesses in the dark. It’s like playing poker in Las Vegas. Sure, you might run into another tourist that’s easier money than you. However, most likely you’ll be sitting on a table of regulars and not know it.
In which case, you should take a lesson from Mike McDermott, “If you can’t spot the sucker in your first half hour at the table, then you ARE the sucker.”
More often than not, you will lose your money if you’re not knowledgeable about the subject. Be prepared to lose it all.
I’m a software developer and I’ve been close to the world of startups for years. Employees are increasingly searching for ways to sell their shares in the next big thing.
The Nasdaq Private Market exists to offer that liquidity. A private company can employ their services to offer previous investors and employees means to sell their shares.
Although you can’t just waltz in there and purchase private shares, there are other options.
Today, you can find a number of mutual funds which give you access to private company investments. And surprisingly, you can even get your hands on private equity. There are some private equity firms traded publicly.
If you’ve seen the movies The Big Short or Margin Trade, you’re probably familiar with mortgage-backed securities.
Mortgage-backed securities were largely responsible for the Great Recession.
According to Wikipedia, a mortgage-backed security is a “a type of asset-backed security that is secured by a mortgage or collection of mortgages”.
Believe it or not, mortgage-backed securities are now offered by Fannie Mae and Freddie Mac. That’s right, the federal government is in the business now.
Mortgage-backed securities can be purchased for as low as $1,000. Much like REITs, mortgage-backed securities can serve as an alternative investment option to generate income.
If you don’t want to invest directly, there are plenty of ETFs on the market which expose you to mortgage-backed securities.
Websites like Lending Club specialize in personal loans with a twist.
Instead of receiving a loan from a bank or American Express, you get your loan from other people.
Interest rates can range from 5.99% to 35.89% and depend on all of the factors you’d expect. When you invest, you receive monthly cash payments as your borrower pays you back.
Even with all of the wild fire, some people still find consumer loans as a way to diversify. You might not achieve 10-12% returns like the stock market.
As long as you don’t over extend your portfolio, consumer loans might be a decent alternative investments option.
Yes, that’s right. It was theoretically possible to invest in Hamilton.
Even though only about 25% of shows are profitable, investing in Broadway is a viable alternative investments option.
However, I would relate investing in Broadway to technology startups. I would plan on losing your money 100% of the time.
Instead, invest because you love it. You may get lucky and hit a home run, but chances are you won’t.
It’s like when I purchased stock in a natural gas company a few years ago. I made the purchase because I wanted to invest in the sector. At this point, I’ve lost over 90% of my money, but it doesn’t really bother me.
Author Bio: Derek started learning about saving money at a young age. He was lucky enough to learn from the best source possible: his parents. Derek is a software engineer by trade, but writes about personal finance in his free time. You can get his free eBook which gives you 31 days of money saving tips.
[Photo Credit: kaboompics]
Hi, my name is Jon and I run Penny Thots. I’ve been interested in personal finance since high school and love writing and talking about it. You can learn more about me in the Authors section of this site.