These smart investments will not only protect you from a market crash but can also offer solid returns on your money
Stocks are expensive, historically expensive. In the past, investors could count on bonds to act as a cushion when the stock market crumbled but even bonds are looking risky these days.
Robert Shiller, the economist that warned investors before the internet bubble popped, told CNBC in April that stock prices were, “dangerous” and that we’ve only seen prices this high twice before, in 1929 before the Great Depression and in 2000.
What’s an investor to do if stocks could be set for a crash but bonds may not fulfill their historic role as safety investments?
The answer, look for smarter investments in other assets!
As an investment analyst for nearly a decade, I’ve followed the rise of alternative investments since the financial crisis. Thanks to the JOBS ACT, these investments have gone mainstream and are changing the way the wealthy invest.
These alternative investments provide diversification from the risks in stocks and bonds but still offer great returns. That makes them smart investments for anyone that needs to protect their money from a market crash but still needs to grow it to reach their financial goals.
I’ve been investing in these alternative investments for years but most people don’t even know they exist.
Benefits of Making Smart Investments in Alternative Assets
- Higher returns compared to similar assets from liquidity and demand characteristics
- Diversification from a traditional stock and bond portfolio means higher returns with less risk, especially during a recession
- Ability to more finely-tune your investments to match financial goals and risk tolerance
Real Estate Crowdfunding: Old Investment, Smarter Approach
I started my professional career as a real estate analyst and have owned residential rentals since my mid-20s so real estate investing has always held a special spot in my portfolio. No other asset has made as much family wealth as property…like the man said, it’s the only investment they’re not making anymore.
As a physical investment rather than a financial asset like stocks that only have paper-value, real estate is a great investment. Even against the worst real estate crash in history, real estate has still produced an annual return of 9.5% over the last two decades according to the National Association of Real Estate Investment Trusts.
The problem with real estate investing is that it’s a pain to manage. With six rentals and a full-time job, I could barely keep up with repairs and tenant headaches.
Now, there’s a smarter way to invest with real estate crowdfunding.
Real estate developers post their projects on crowdfunding sites which have analysts that verify deals before being posted on the platform. Investors browse the investments and can invest as little as $1,000 in each deal. Project owners pass the rent and investment returns through the site which passes the money on to investors.
RealtyShares is one of the largest real estate crowdfunding sites and recently acquired the Acquire platform to leverage its commercial real estate and technology expertise. More than 57,000 investors have funded 750 real estate deals across residential and commercial properties and have collected more than $83.2 million in proceeds.
PeerStreet only offers real estate loan investments with historical returns between 7% and 12% on terms between six and 24 months. Investing in loans is less risky than equity investments because the debt is secured by the property.
One feature on PeerStreet that I haven’t seen anywhere else is its automated investing function. You choose the criteria for loans in which you want to invest like property type or region and the site will automatically invest any excess cash in new loans.
With real estate crowdfunding, investors can get instant diversification by investing in different property types across the country and for a fraction of the cost compared to direct investment. I still invest directly in properties but use crowdfunding to fill out my portfolio. I recently interviewed a portfolio manager of a large real estate investment firm about his investments in crowdfunding.
Real estate crowdfunding gives me the ability to easily spread my investment risk and get professional management on properties with high return.
Smart Investing that’s Socially-Responsible
I never used to think much about socially-responsible investing (SRI), avoiding the ‘sin’ stocks and looking for companies with strong environmental and social standards. As I get older and as the world I leave to my son becomes more important, I’m starting to see SRI as a smart investment in the future as well as for the returns.
Socially-responsible investing is where you avoid stocks of companies in the tobacco, gambling, firearms, defense and alcohol industries while looking for companies that set the example for environmental and social standards.
It’s a way to incentivize companies to use higher environmental standards, protect human rights and promote diversity with your investment dollars.
I recently started investing on Swell Investing, a website created to give investors a less expensive approach to socially-responsible investing.
Through the platform, you can invest in one of six funds with different SRI themes including Renewable Energy, Disease Eradication, Healthy Living, Clean Water, Zero Waste, and Green Technology.
Each fund holds dozens of stocks in its theme, giving you instant diversification, and the site charges one flat fee of 0.75% a year.
That means I’ll pay just $3.75 in fees on my $500 initial investment for the year. There are no trading fees or commissions and no management fees for the funds.
Swell recently lowered its minimum for investing to just $50 – Click here to get started today
The six funds have returned an average 16.0% over the last year versus a return of 14.7% on the Russell 3000 market index. Over the long run, socially responsible investing returns have been close to market returns but offer the added benefit of promoting higher standards in investment.
These may not be alternative investments different from stocks but a lot of these companies are the kind of innovative game-changers that are setting the trends for the future. Even in the event of a market crash, these are the kind of companies that survive and outperform.
Peer Lending Investing: A New Innovation in Bond Investing
P2P investing is a great balance between stocks and bonds. Peer lending investments are loans to individuals, just as bonds are loans to corporations. That means they have contractual payments and a fixed interest return. Whereas even the riskiest corporate bonds return just 5% annually, p2p investments offer returns similar to stocks.
I invest through Lending Club, the world’s largest peer-to-peer lending platform and have booked a return just under 10% this year.
Investing in peer lending is straight-forward. Borrowers fill out an application and the website checks their credit report, verifying employment and credit information. Loans are for three- to five-years and given a risk rating to help investors pick which loans they want to fund.
Investors can invest as little as $25 in any loan and can set up an automated system where the site invests any cash in loans that meet your investment criteria. Borrowers have their loan payments automatically deducted from their bank account and Lending Club splits payments among the investors.
One peer loan investor averaging 12% annual returns on his loans shared his experience and the criteria he uses to pick investments in a recent interview.
I’ve had just one loan in 187 go unpaid so far, that’s less than half a percent and the return on the rest of my loans means a solid return for this smart investment.
With peer loans, I do my investing through an IRA retirement account. That way, I don’t have to pay taxes each year on the interest income.
An Old Investment Platform with a New Name
Our final smart investment isn’t new or an alternative investment at all but it’s one I wanted to highlight because it can save you hundreds on investing.
I first heard about TradeKing at a conference of financial bloggers in 2015 and was immediately hooked by the low-cost and easy-to-use site.
The investing platform is now called Ally Invest after it was bought by Ally Financial last year but they still have some of the lowest trading fees of any discount broker. Stock purchases are $4.95 and active traders or accounts with at least $100k pay just $3.95 per trade. There’s no account minimum and the platform offers all the features you’ll need of an online investing platform.
What Makes a Smart Investment?
There’s some strong return potential in each of these investments but what makes them smart is the ability to put them in your portfolio of stocks to produce high overall returns with less risk. This is the whole concept of diversification and it’s one of the smartest ways you can invest.
Stock prices will fall. Maybe not tomorrow or even this year but the very nature of our market system means stock prices don’t move sideways, they crash.
It’s inevitable that investors get over-excited about stocks during a bull market and then overly-pessimistic when the economy stumbles. By combining these smart investments in real estate and p2p loans with a portfolio of stocks and bonds, you protect your money when the stock market crumbles.
Real estate will do well even during a normal recession because there is a very limited supply of land. Peer-to-Peer loans should continue to provide solid returns because these are contractual loans on borrowers’ credit reports. Defaults may increase slightly but you’re still looking at positive returns versus steep losses in stocks.
How to combine all these investments together is another way to use them smartly. The percentage of your money in each asset class will change as you age, as you need protection rather than return.
A Smart Investing Strategy
A smart investing strategy means more than just putting money in each of these asset classes. You can’t expect to invest an equal amount in each, forget about it and then retire to a deserted island in the South Pacific.
You can still retire early to that island…but you have to be smart about how you use these investments.
First you need to understand your investing goals and tolerance for risk. That means understanding the point at which you start freaking out over hiccups in the stock market and other assets. If you have a low tolerance for risk, maybe you want to own less in stocks and p2p loans while investing more in real estate and bonds.
Knowing how to do this comes with knowing the asset classes and the risk in each. Stocks offer the highest potential returns but also the most risk; followed by peer-to-peer, real estate crowdfunding and then bonds.
Whether you invest a little or a lot in a specific asset class, you should always have something in each. This will help smooth out your returns in any market and get those diversification benefits we talked about.
Almost as important as your investments in an intelligent investing plan is the idea of investing regularly. Even at a 7% annual return, the money you make on your investments doesn’t equal half of your portfolio for 20 years (assuming regular deposits).
Your portfolio is just as much a savings account in which you need to add money as it is a way to make money on your money.
- Deposit money regularly and invest across three or four asset classes including stocks, bonds, real estate and p2p
- Match the percentage you have in each asset class with factors like your risk tolerance, goals and age
- Use a buy-and-hold approach for stress-free investing and a smart way to save money on fees
- Rebalance your investments every ten years to reflect changes in risk tolerance and age
Other Smart Investments to Consider
We didn’t talk much about bonds or another smart investment to consider so I thought I would update the article to include them.
Traditional bonds are a critical piece of an intelligent investing strategy, balancing your risk in stocks with the stability and cash flow of fixed-income. Even as interest rates increase and bond prices suffer, the higher rates will mean higher returns on new bonds you buy and the ultimate safety of the investments will help you sleep at night when the market crashes.
Gold is another smart investment to consider though not necessarily in the asset itself. You’ll see all kinds of commercials to buy physical gold when the economy stumbles. It’s a good store of value, holds up well against inflation and can even produce solid returns as everyone seeks safety.
But I don’t like gold investments because they pay nothing until you sell. You could hold that gold bar for a decade and unless you’re able to buy-low and sell-high, you get nothing for your time.
Shares of gold miners might not jump as fast as gold prices, but they benefit from the same dynamics and will help you protect your portfolio from stock market turbulence. Stocks of gold miners also pay dividends while you hold them so you get rewarded for your investment.
Not only has the Gold Miners ETF beaten the gold fund by more than 5% over the past three years but it also put cash in investors’ pockets every year.
Why Go off the Beaten Path for Alternative Investments?
There’s more to investing than just the return you earn. Even though these smart investments can offer returns comparable with stocks, the real power is in how they reduce risk in your portfolio.
By combining a few of these investments with a portfolio of stocks and bonds, you get a variety of assets that react differently to the economy and other factors. That means when one investment plunges, your overall wealth doesn’t follow it because the other assets will help keep its value. Smart investing is diversified investing and these investments are about as diversified as you can get!