These two alternative investment strategies can help you earn high returns without having to follow the herd into expensive stocks
The stock market is ridiculously expensive. I’ve been an equity analyst for more than a decade and am always frustrated by these late-stage innings in bull markets. Despite warning signs and stock valuations near record highs, investors keep piling money into the market.
The market just can’t resist partying like it’s 1999…or 2007!
What’s an investor to do then if everything is screaming sell but they still need those double-digit returns to meet their investing goals?
Enter alternative investments, asset classes outside the normal stocks and bonds that offer the opportunity to lower your portfolio risk while still earning high returns.
I’m calling out two alternative investments in this post that could be your best investments over the next ten years. Both of them are still undiscovered by Main Street investors but could be the breakout investments everybody is talking about over the next few years.
What are Alternative Investments?
Examples of Alternative Investments include:
- Real Estate
- Startup Investing
- Hedge Funds
There are several factors that make an investment ‘alternative’ and many of which may actually be a benefit to investors.
- Lack of liquidity
- Lack of Public Information and Valuation
- Potentially Higher Transaction Costs
- Regulatory Barriers to Investment
The first factor, lack of liquidity, is that you can’t just buy and sell these investments as quickly as you could stocks and bonds. Buying or selling real estate can take weeks at a minimum to get all the documents together. Other investments like startup investing may actually require that you hold the investment for a few years before you can sell it.
This is one of the first things investors complain about in alternative investments, that they can’t jump in and out as with stocks. Is that really a bad thing? Panic selling in the stock market has led to investor returns less than half the overall market. Is it necessarily a bad thing that you are locked into an investment and can’t make these bad investment decisions?
The biggest hurdle to investing in alternative assets is that there is not as much information available publicly to make your decision. Investing in stocks is easy with just a click through to your brokerage account and a quick read through some analysis provided by experts.
You don’t get that with most alternative investments and will have to do the analysis yourself. The upside is that investors willing to put in the time are very well rewarded. A study by Willamette University found average portfolio returns of 27% for angel investors in startups. That’s more than three times the long-term return on stocks.
The downside to alternative investments has always been the higher transaction costs. It can cost thousands to buy or sell real estate. The internet revolution has solved this problem though with two evolutionary steps in fintech, equity crowdfunding and real estate crowdfunding. Through crowdfunding websites, you can now invest in these two asset classes with fees comparable to other investments.
For the longest time, regular investors were locked out of alternative investments. By law, you couldn’t invest in startups if you didn’t have at least a million in net worth. That’s all over now with the passage of the JOBS Act and crowdfunding.
How Can Alternative Investments Make You Rich?
There are two ways alternative investments will help you reach your investing goals and can even make you filthy, stinking rich.
First is the obvious, the double-digit returns. While the stock market has provided an average 8% return over the last several decades, many experts are saying investors will be lucky to get 6% annually in the future because of low economic growth and already high valuations.
Compare that with investing in startups where it’s not uncommon to get 1,000% returns on an investment. Peter Thiel’s Facebook investment was a gain of 340,000% and Mike Markkula’s 1977 investment in Apple earned him a return of 81,200% just three years later when the company issued shares.
Even real estate crowdfunding, investing in a piece of real estate projects, generally offers returns of 9% to 20% annually. An annual return of 14% grows a $10,000 investment to almost $510,000 in thirty years compared to just over $100k if you invested in stocks.
Put that same $10,000 in startups with equity crowdfunding and you could be looking at millions more within three decades.
The second benefit to alternative investments is that they diversify your risk away from stocks. The stock market has lost half its value in two separate occasions over the last 20 years and warning signs are flashing that it could happen again soon. Real estate and startups operate on different economic factors than stocks so they don’t rise and fall in lock-step with the market.
Will your returns on alternative investments be as high if the stock market crashes? Probably not. You might even lose money on some deals but your total portfolio value won’t crash along with stocks.
That higher return plus a smoother ride in your portfolio means you get to your financial goals faster and with less stress!
What You Need to Know about Alternative Investment Strategies
One of the most exciting new alternative investments is equity crowdfunding. This is an investment in startup companies before they issue stock on the public exchanges. Think Peter Thiel’s $500k investment in Facebook that turned into $1.7 billion when the company had its IPO in 2012 or the California private school that invested $15,000 in Snap and made tens of millions in its 2017 IPO.
With equity crowdfunding, you receive an ownership in a private company. You can invest as little as $100 in many companies through some of the equity crowdfunding platforms. If a company is later bought by a larger company or issues shares on the stock market, early investors stand to cash out big time.
There are risks to startup investing, as there is with all alternative investments and even stocks. About half of the investments made by angel investors end up returning less than the original investment or nothing at all. The fact that a few investments go on to provide those huge returns is how early investors are able to book an average 27% annual return on their portfolio.
Want to know exactly how to invest in startup companies? Check out Investing in the Next Big Thing, available on Amazon now. The book takes you through every step in finding startup companies and investing for returns of 20- and 30-times your money. I cover everything from how to invest to the process I’ve used to advise wealthy investors on startup investing for years.
How is Crowdfunding Changing Real Estate?
The other alternative investment I think has the potential to change investing for Main Street investors is real estate crowdfunding. Through real estate crowdfunding portals like RealtyShares, you can invest in a share of a real estate project for thousands rather than having to put down millions to buy individual properties.
There are two types of investment within real estate crowdfunding, debt and equity. Debt will offer a more stable payoff with regular interest payments and a maturity date but is usually at lower returns. Equity investment is taking an ownership share of the project so involves more risk but the returns can be much higher.
Most real estate crowdfunding deals offer pages of analysis and forecasts so you don’t have to do as much research as with startup investing or other alternative investments.
I’m not saying you should put all your money in alternative investments or that it is a guarantee to wealth. These investments are high risk and high return. The diversification I talked about is only possible if you invest in different asset classes including stocks, bonds, startups and real estate.
I recommend investing no more than 20% of your total portfolio in alternative investments. For example, if you have $50,000 total to invest then you would mark $10,000 ($50k times 0.20) for different investments like real estate and equity crowdfunding. This is going to spread your risk out from stocks but still give you a chance at those high returns in alternative investment strategies.