If you have at least $1 million to invest, you may be interested in looking beyond the stock market for future investments. True, stocks have been on a wild ride – mostly up – for the past 10 years. Over that decade, the index has returned an average of 13.9% annually, including 18.4% in 2020 alone.
But what if the next decade isn’t as kind to stocks? If not, there are plenty of alternative investments you can use to keep your portfolio growing.
That doesn’t mean you need to abandon stocks. But you may want to begin moving smaller amounts of your portfolio into potentially profitable alternatives. When you have $1 million to invest, you’ve got the breathing room to do just that.
Real Estate Investment Trusts (REITs)
Real estate is a primary alternative to stocks when it comes to growth. You can invest in real estate just as easily as you can with stocks using real estate investment trusts, or REITs.
REITs work something like mutual funds, but hold real commercial properties. Examples include office buildings, large apartment complexes, and retail centers.
2020 wasn’t a good year for REITs in the face of the COVID-19 pandemic and the large-scale remote basing of employees. But that could mean the industry is poised for a turnaround as the virus recedes with the rollout of several vaccines. Now may be the perfect time to begin investing in REITs.
But just as is the case with stocks, there may be certain REIT sectors likely to outperform others.
“One strategic area of growth that savvy real estate investors are shifting to involves manufactured housing,” advises Marina Vaamonde, founder of PropertyCashin.com, and a commercial real estate investor herself. “Demand for manufactured homes is increasing as the effects of COVID-19 take a swipe at jobs and the economy overall. Low-cost housing is becoming a top priority. You can’t get any better when it comes to affordable housing than manufactured homes.”
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She does caution, you will need to look past the “trailer park stigma” to understand the potential of both manufactured housing and RV communities.
“These types of specialty REITs have produced annual total compound returns of 23% percent from 2010 to 2019,” Vaamonde adds. “2020 saw an enormous bump with returns exceeding 40%. Private companies are also setting up mobile home park funds which show a track record of annualized distributions well into the double digits.”
Real Estate Crowdfunding
This is another way to invest in real estate, but it offers an opportunity to get involved in very specific property deals. Real estate crowdfunding platforms bring investors and property developers together.
As an investor, you can select the properties you want to invest in. It provides an opportunity to get involved in commercial real estate, and even some types of single-family property deals, without needing to manage the entire project from the ground up.
“The volatility we’re currently seeing in public markets has driven a fresh wave of interest for alternative asset classes,” reports Charles Clinton, CEO and Co-founder of EquityMultiple. “Commercial real estate is particularly attractive as a sector that used to be reserved primarily for institutional level investors, and is now opening up for individual accredited investors to take part in. Thanks to real estate crowdfunding platforms like ours, you have visibility into commercial real estate opportunities all over the country and can take part in a fractional investment in projects. You don’t need to drop millions in capital into a single project, or even several – our minimum investment is $10,000.”
You’ll need to tie your capital up for several years, since individual real estate projects are long-term investments.
Fixed Income Annuities
An annuity is an investment contract you make with an insurance company. You can either turn a flat amount of money over to the insurance company, or make payments over several years.
At a predetermined time, the annuity begins providing you with income payments. Since those payments can be set up on a monthly basis, annuities can be an excellent choice for a retiree who either doesn’t have a pension, or wants to supplement the one he already has.
But annuities are complicated, and not all are worth investing in. One exception worth considering is a fixed-indexed annuity, or FIA.
“This investment isn’t sexy or cool,” advises Trevor Ward, CPA and Licensed Financial Advisor with Kinetic Financial. “It is, however, a way to protect your hard-earned principal while earning a consistent 4-6% annual return. FIAs are tax-favored accumulation products issued by insurance companies and are a great alternative to investing in bonds. As interest rates increase, as they inevitably will, bond prices will decline, thus adversely affecting portfolio returns.”
Ward explains that FIAs provide 100% guaranteed principal protection. They also provide tax-deferred interest, similar to retirement plans, like IRAs and 401(k)s. You won’t pay any tax on your accumulated investment earnings until you begin receiving payments from the annuity.
FIA Investment Income
The income you receive on and FIA is tied to an underlying market index. And in the way FIAs are set up, you’ll benefit from the gains without getting clobbered by losses.
“For example, if the investor chooses an accumulation index based on the S&P 500 and the S&P returns 7%, then the investor will have 7% interest credited to their account,” Ward explains. “On the flip side, if the S&P returns -7%, the investor’s account is credited with $0 interest but is not subject to negative returns.”
Ward also reports FIAs are fairly low on the fee front when compared to other insurance related investment products.
FIAs can be a solid investment choice if you’re looking for the principal security of short-term bonds, but with a much higher potential investment return.
Participating Cash Value Whole Life Insurance
Not many people think of life insurance when it comes to investing. For most people, it’s really not a good choice.
That said, whole life insurance can provide a real advantage to an investor with at least $1 million. That’s because the policy can be used to build cash value, but also provide a tax-free benefit to their loved ones upon death.
But only certain types of whole life insurance policies make the cut.
“Participating Cash Value Whole Life policies can be a very suitable and valuable way to grow your money,” advises to Michele Lee Fine, CEO and Founder of Cornerstone Wealth Advisory . “Participating cash value whole life plans are the least profitable product for the insurance company, as they provide the highest guarantees and transfer all of the risk to the company, providing multiple layers of guarantees and growth for the policy owner. Long-term. You’re getting the safety and security of a bond-like portfolio, but the performance of a long-term, best-in-class performing stock but without the volatility, and with more benefits along the way.”
Participating cash value whole life insurance can also provide an important diversification away from stocks.
“You’ll participate in the insurance company’s profits in the form of a tax-free dividend,” Lee continues, “the values are completely uncorrelated to the stock market so when the market crashes, your values are unaffected by market volatility or losses. In fact, your cash values are guaranteed to rise every single year. And while cash values are low in the early years to compensate for that, over time your values compound income tax-free as long as the policy stays in force.”
Funding Your Policy
The policies can be pre-funded with a lump sum, or contributed to annually. And unlike retirement funds, which are tied up for decades and fully taxable upon withdrawal, cash values within these policies, once credited to your plan, are available to use along the way.
Peer-to-Peer (P2P) Lending
If you’re tired of getting low interest rates on bank investments and even US Treasury securities, you may want to take a look at carving out a space in your next income portfolio for P2P lending. It offers an opportunity to get much higher interest rates, sometimes even double digits, on a relatively safe investment.
P2P lending involves making loans to consumers through lending platforms. These are personal loans, which are unsecured, and can be used for nearly any purpose. However, some P2P loans are business loans.
That combination naturally involves a certain amount of risk. But you can control that risk by investing primarily in higher grade loans. What’s more, you don’t actually purchase an entire loan. Instead, you invest in small slices of many different loans, for as little as $25. These small investments are referred to as “notes”.
Much like a stock portfolio, you can invest several thousand dollars in hundreds or even thousands of individual loans through the use of notes. They typically have a term ranging from three years to five years.
You won’t want to move your entire fixed income portfolio into P2P loans. But you can improve the overall rate on that portfolio by adding just a small allocation in P2P loans.
If you’ve got at least $1 million to invest, you probably already have plenty of conventional investments, like stocks and bonds. But if you’re interested in special situation investments, true alternatives that offer an opportunity to provide outsized returns, there are several you may want to consider.
You probably won’t want to invest any more than a small percentage of your portfolio in any of these investments. But consider the possibilities below:
I’ll admit, wine doesn’t remotely come to mind with investing. But it is a potentially profitable investment, not the least of which because fine wines are popular among connoisseurs and well-to-do consumers.
Don’t dismiss fine wines out-of-hand. They’ve steadily outperformed the S&P 500 since at least 2005.
“Wine is generally more stable than most other investments during periods of global economic downturn,” reports Anthony Zhang, CEO of Vinovest, an investment platform specializing in fine wine investments. “It enjoys a low correlation with the global stock market, meaning that its value is largely unaffected by volatility. Instead, value is driven by supply and demand. Fine wine is inherently scarce, which allows for greater price appreciation than many other assets.”
Zhang also reports that wine is tax efficient, since you won’t pay taxes until you take personal delivery of the wine you’ve invested in.
And since you can take possession of the wine in your portfolio, it becomes a true tangible asset, much like real estate, and precious metals.
This is an investment I’m personally familiar with, and one I can vouch for. However, it does need to be said that digital assets are both an investment and a business at the same time. You can purchase digital assets, but you may need to invest some time and effort raising their value. But if you can, the payoff can be rich.
“There is a growing movement of investing in ‘digital assets’,” reports BretzMedia owner, Sam Bretzmann. “This would be something like a website, Software as a Service product, or social media accounts. With a little know-how or the right partner, you can buy existing assets and either maintain them for monthly income or improve them and sell them for a significant profit.”
How much can you make on your investment?
“As an example,” Bretzmann adds, “Many websites will sell for 24 to 36 times monthly revenue. A site making $1,000 per month can often be sold for $24,000 – $36,000. If you can take that site and go from $1,000 per month to $3,000 per month, you could be looking to sell it for $72,000 – $108,000.”
But Bretzmann does caution that digital assets are not a risk-free investment.
“There are a lot of moving parts, not only with your site but also with factors outside of your control (like a Google algorithm update that tanks your rankings). But as a way to diversify your investments, digital assets can provide a fun and interesting alternate revenue stream.”
Digital assets are a venture for someone who likes an investment with an entrepreneurial component.
Commodities can be a bit scary if you’ve only ever invested in paper assets, like stocks, bonds and funds. And, while they may not be suitable as a long-term investment, they can be profitable when you invest in commodities that are poised for an upturn.
“Cyclical commodities are an attractive option, especially metals that do well when global growth is accelerating (China’s growth is imperative for this theme),” advises Juan Pablo Villamarin, Senior Investment Advisor at Intercontinental Wealth Advisors, LLC. “But they also benefit from the solid fundamental demand from batteries and chips. That includes base metals like nickel, aluminum, and copper, and some other minor metals like silicon. The portfolio would be active on playing the futures market of these commodities.”
Any commodities, including cyclical commodities, carry risks. But if you can invest at the right point in the economic cycle, the rewards can justify that risk.
Private Business Investments
Though we often think the best investments are “somewhere out there,” some of the very best investments can be closer to home than you think. Local businesses and business startups have the potential to produce dramatic returns.
Private business investments are often conducted by angel investors. That’s where wealthy investors pool their money and provide multi-million dollar investments in promising business startups.
But you can also invest in small businesses in your area, both upstarts and established businesses. In this way, you can become a silent partner to a rising entrepreneur. In doing so, you’ll earn a regular slice of the net profits from the business.
“An alternative to the stock market is to put your money in private business investments,” recommends Bruce Hyde, Partner, Chief Compliance Officer and Wealth Advisor at Round Table Wealth Management. “This could be a direct investment into a business, or it could be some other pooled investment through a private equity fund. It all comes back to risk-reward and how big is this million-dollar investment in relation to the whole portfolio.”
Hyde does recommend taking steps toward risk reduction. “I would advise on getting diversification through a pooled investment like a private equity fund,” Hyde continues. “Again, you’re bargaining illiquidity going back to the size of the portfolio. If it’s $1 million out of a $50 million portfolio, then you should be fine. But if the investment is a sizable portion of the entire portfolio, I would advise against this as you may need immediate liquidity.”
While the financial media has been nothing less than astonished by the rapid and complete recovery of the stock market from the February/March crash of 2020, cryptocurrencies may be the real stars of the show for the past year.
That doesn’t mean you should rush out and take a big position in this or any other crypto. But it does seem Bitcoin has been benefiting from the uncertainty surrounding the coronavirus and its implications for the economy.
Is it possible Bitcoin has become the new ultimate safe harbor investment, taking the position traditionally held by gold?
“I’d like to suggest that cryptocurrency is becoming a viable alternative,” says StratFI Founder, James H. Lee. “As a fee-only financial advisor, I’m recommending that most of my retired clients have a 2% allocation to crypto in their portfolios. This is a partial hedge against inflation and a falling dollar. But what is MOST interesting is that certain cryptocurrencies are beginning to generate steady returns in the form of staking – the crypto equivalent of generating interest. Earning 4-8% through staking is relatively commonplace, although you may have less liquidity if you decide to stake your crypto.”
Staking, according to Lee, allows for validating transactions on the crypto network. “It is not risk-free,” he warns, “And you can’t stake with every crypto. Some of the most popular staking coins include Ethereum (ETH), Tezos (XTZ) , Cardano (ADA), and Algorand (ALGO).”
Is it possible cryptocurrencies are finally taking their place as a mainstream investment? Increasing institutional participation seems to indicate a trend in that direction.
There’s no question, stocks have had an incredible run for the past decade, and especially in 2020 – all things considered. But how likely is that they’ll continue in the future, and do you want to stake your entire portfolio on the same trend?
Now may be the perfect time to begin spreading your investment wings, by investigating some portfolio alternatives you haven’t considered in the past.