For many investors, the highs and lows of playing the stock market can feel like a roller coaster of emotions. Without a doubt, the ups and downs of the stock market are enough to drive investors crazy. That’s why, for those of us without a crystal ball, finding a less volatile option to invest your hard-earned cash in is definitely worth exploring.
Thankfully, there are a host of alternatives to investing in the stock market that can help balance out your portfolio while still experiencing positive gains. With that being said, let’s take a look at 6 alternatives to investing in the stock market:
6 Alternatives to Investing in the Stock Market
Bonds are considered a traditional investment option with a variety of types depending on the issuer, duration, risk, and credit quality. Bond categories include: corporate bonds, municipal bonds, federal government bonds, zero-coupon bonds, and junk bonds. Some bonds are traded on exchanges, while others are restricted to over-the-counter trading.
Series EE bonds can provide a “fixed-income security” investment option due to their fixed interest rate for a certain time period, while series I bonds pay interest adjusted for the rate of inflation. One downside to these type of bonds is you will face penalties if you redeem them in the first five years. However, if you’re looking for a long-term play, then savings bonds can produce healthy returns as a relatively low-risk investment. Furthermore, the large-scale use of the Internet has led to the U.S. Treasury making it easy to invest online through electronic bonds that can be purchased via TreasuryDirect.gov.
2. Certificates of Deposit (CDs)
CDs are a long-term savings investment option issued by banks for a fixed amount of time, and at a fixed interest rate that’s typically higher than leaving your money in a savings account. Investors can seek better returns by locking in a longer maturity term in order to invest more over time. However, like bonds, there may be substantial penalties for withdrawing funds before the maturity date. To account for timing, some savvy investors develop a CD ladder by spreading out their returns over time.
Gold is a viable competitor to stocks because it’s a tangible liquid asset that can provide diversification to an investor’s portfolio. In fact, some advisers may suggest allocating up to 10 percent of your portfolio in gold since it tends to act as a rescue asset during a downturn, or recession. There are a number of ways to invest in gold products such as: buying and holding physical gold (coins or bars), gold exchange-traded funds (ETFs), and gold accounts.
4. Individual Retirement Accounts (IRA)
An IRA is an account established with a financial institution which gives investors the opportunity to save for retirement with tax-free growth, or on a tax-deferred basis. The risk tolerance for these type of accounts depends on how the funds are invested. Steven Dolvin, Ph.D., CFA, associate professor of finance at Butler University suggests, “If I invest $5,000 in an IRA and put it all in a U.S. government bond fund, that’s much safer than an investor putting the same amount in a small-cap stocks fund.”
There are three main types of IRAs:
- Traditional IRA – Investors make contributions using funds they may be able to deduct on their tax returns, that way their money has the opportunity to grow tax-deferred until retirement.
- Roth IRA – Investors make contributions using after-tax funds, that way their money has the opportunity to grow tax-free, with eligibility for tax-free withdrawals during retirement.
- Rollover IRA - Rollovers involve investors moving eligible assets from an employer-sponsored plan like a 401(k) or 403(b) into an IRA.
The overall concept and tax benefits of an IRA allow investors to potentially grow their savings much faster than placing funds in a taxable account, which makes it a more stable and safer option compared to the stock market. Just be mindful that there are early withdrawal penalties in addition to income tax on the withdrawal amount.
5. Real Estate
The real estate market has seen tremendous growth since the housing collapse during the Great Recession. According to a Morgan Stanley Wealth Management Investor Pulse Poll in 2014, real estate has become a leading choice among millionaires as an alternative investment.
Traditional ways to invest in real estate include:
- Fix and Flip Real Estate Investing (residential and/or commercial)
- Buy and Hold Real Estate Investing (residential and/or commercial)
- Investing in a real estate investment trust (REIT)
Whether your plan is to fix and flip, or buy and hold an income generating property which can be used to collect rents or leases, real estate is an attractive asset class because you are investing in something tangible. Therefore, if the market were to go belly-up, at the very least you’d still own something you could throw a rock at. Additionally, investors who don’t want the responsibility that comes with the building and renovation process, or with being a landlord, may opt to buy shares in a REIT.
Overall, investing in the right property can be a less volatile option compared to the playing stock market. Of course, there is a certain level of risk involved in any investment property, but as a long-term strategy the ultimate sale, or generated income, of property can help contribute a large portion of your retirement fund.
6. Peer to Peer Lending (P2P Lending)
Peer to peer lending, also known as crowdfinancing, is a fairly new and innovative alternative method of investing. This concept involves an individual lending funds to another individual who, in turn, receives interest distributions on the principal amount borrowed. Peer to peer lending gained mainstream popularity by platforms such as Lending Club and Prosper Marketplace who specialize in personal loans.
Today, peer to peer lending has penetrated a wide range of industries, giving individuals the opportunity to diversify their portfolio by investing in asset classes they may have never had access to in the past. Some of the different types of investments include: student loans, real estate loans, business loans, payday and personal loans. Another perceived advantage of peer to peer loans is that they allow investors to participate in contributing funds to individuals, business, or causes they deem positive and moral.
Because most peer to peer lending platforms offer unsecured loans, the biggest risk factor is a loan going into default. However, some of the leading platforms have recovery mechanisms in place in case of a default scenario. Regardless, it is extremely important to perform your due diligence before making an investment. In the end, making the right investment can generate healthy returns through peer to peer lending, as well as diversify your portfolio in ways that were never available less than a five years ago.
Evaluate Your Options
Clearly, the stock market is not the only option available for investors. Whether its bonds, CDs, gold, IRAs, real estate, or the many opportunities peer to peer lending has to offer, the reality is diversification exists through a number of vehicles. When it's all said and done, these options represent just some of the alternatives to investing in the stock market, and none are necessarily "better" than the other, or risk-free for that matter. Therefore, don’t be afraid to educate yourself and research what investments will fit best within your personal portfolio ahead of time.
How Can Patch of Land Help?
At Patch of Land we offer a variety of benefits to help diversify your portfolio. For starters, our real estate crowdfunding platform specializes in debt-based, short-term residential and commercial investment offerings. In addition, we offer the ability for our investors to use their self-directed IRA (SDIRA) to invest on our platform. Furthermore, Patch of Land was the first platform to prefund our real estate loans so that our investors can begin earning interest as soon as their funds clear escrow.
So far, we’ve received a lot of positive feedback from our investors who appreciate our innovation and our efforts to help rebuild and grow communities. With so many different platforms and investment options available, our goal is to remain ahead of the curve and continue to offer our customers the best investment opportunities we possibly can.
This entry was originally posted on September 10, 2015.