November 2020 - HappyNest

Diversify your portfolio with alternative investments.

Those early in their investment journey might take that to mean buying stocks from a few different companies whose operations are uncorrelated.

But that would amount to a basket with some different colored eggs in it, all still bound to the fate of the basket.

Though the stock market is the investor go-to, the rise of algorithmic trading has tangled the performance of individual companies to the market at large.

That’s why investors are looking to diversify their portfolio by investing outside the stock market in alternative investments.

What are alternative investments?

It’s easier to characterize alternative investments by what they are not. They are not cash, public stocks, and bonds. Consequently, they are generally less liquid and longer-term strategies.

On the upside, they open numerous avenues and opportunities ranging from safe investments with steady yield to high risk-investments with potentially quit-your-job returns. But where to start?

Here are seven of the best stock alternative investment ideas investors can consider.

Alternative investment 1: Private REITs

Barrier of entry: Moderate
Risk factor: Low
Potential returns: Above average

One way to get into the real estate market is through a private REIT. They have all the characteristics of REITs traded on the stock market, except they are privately held.

Real estate is widely considered to be a safe and reliable investment over time. Private real estate investment group are also insulated from stock market volatility since the aren’t caught up in EFT and other stock collectives.

A private REIT uses pools investor capital to purchase and maintain property. As a shareholder, you buy into that portfolio and enjoy the property value gains.

One of the biggest upsides to investing in property is that it generates income. Most alternative investments require capital to be tied up for an extended period of time, and any profit only comes at the point of selling. Real estate also accumulates profit for the point of sale in the form of market value. But it also had the added benefit of generating income while your capital is invested in the form of rental payments.

Compared to buying investment properties and managing them independently, REITs are a ‘set it and forget it’ investing strategy that involves zero late-night tenant plumbing emergencies nor tens, if not hundreds of thousands upfront for a downpayment and a commitment to a mortgage.

HappyNest, for example, allows investors to buy in for as low as $10. By investing in HappyNest, you become a partial owner of our portfolio, which includes an industrial shipping facility currently on a 10-year lease with FedEx and a commercial pharmacy on an 8-year lease with CVS.

That means your can build a passive income stream by becoming the landlord of companies you know are good for rent.

Alternative investment 2: Cryptocurrencies

Barrier of entry: Low
Risk factor: Above average
Potential returns: Above average

Right now, there’s little doubt the United States in poised for growing inflation in the years ahead. Trillions of dollars were printed and put into circulation without a corresponding growth in economic output.

That’s bad news for savers, and impetus enough for investors scrambling to find stable, alternatives to preserving their net worth.

That’s at least part of why cryptocurrencies have gained so much traction from investors.

Once considered somewhat of a joke by big-name investors, the attitudes around Bitcoin and other digital currencies has taken a drastic turn in 2020.

With global markets volatile and the future opaque, a currency independent politics, governments, and stock markets look pretty appealing nowadays.

Flagship Bitcoin has trail-blazed for other cryptocurrencies to get on the radar of institutional investors. Major companies like Microsoft, Shopify, PayPal, CashApp, and Amazon (through a third-party app) now accept Bitcoin, with more on the way.

Some of the brightest minds of our time have taken public interest in the space. Their involvement all but guarantees the space’s growth for the foreseeable future.

The upside to foreign and cryptocurrencies compared to other alternative investments is that they are highly liquid. You can also invest just a few dollars if you want to, so the commitment level is low.

This stock alternative investment has a promising long-term trajectory that is becoming increasingly difficult to dismiss.

However, there are still challenges ahead. The space will likely continue to experience high volatility in the coming years, so investors have to be able to stomach that.

That being said, the whiplash to those price swings can generally be remedied by zooming out on the time chart. The overall trend is still a steady march upward and forward.

Alternative investment 3: Gold, silver, and other precious commodities

Barrier of entry: Moderate
Risk factor: Above average
Potential returns: Variable

At the end of the day, gold is widely considered to be the best alternative investment of all time. After all, it is the undisputed GOAT when it comes to currency longevity. Silver and other precious commodities like copper,

There are several ways to get into trading these, but gold enthusiasts believe in its long term value as a hedge against the collapse of FIAT currency and/or the stock market.

There’s some truth to this claim. As the purchasing power of the dollar declined in the wake of the Great Recession, gold’s price went parabolic.

gold 30-year price chart history, gold is seen as an alternative investment class — goldprice.org

Precious commodity hodlers argue that it has intrinsic value not only in its widespread recognition, but because it also has industrial applications.

On the long term, the upside of gold and other precious commodities has held up for those with patience and long-term horizons. Gold holders had to ensure a major price correction and 7-year sideways period before finally seeing some movement to the upside in late 2019.

Alternative investment 4: Private credit: Private debt

Barrier of entry: Low
Risk factor: Above average
Potential returns: Above average

Peer-to-peer lending cuts the middle man (i.e., the bank) out of lending.

Through platforms like Lending Tree or Peerform, you can lend money (investment) to a person or a business. Then, you play banker and charge interest on repayment.

The returns on private debt can be high – in the double digits.

But for every yang, there’s a yin. High potential returns come with high potential risks.

Applicants’ risk profiles oftentimes do not meet the loan criteria for standard banks. That’s something the private lender (you) have to be willing to take on. If the borrower defaults, well, c’est la vie.

That being said, peer-to-peer lending as an alternative investment idea tends to perform better in economic downturns. That’s because banks become more risk averse and tighten their lending criteria.

In a study released in August of this year by MarketWatch, the peer-to-peer industry was projected to grow by 30% – a sign that investors aren’t quite bearish on this alternative investment strategy just yet.

It’s also worth noting that the industry as a whole saw a high growth period after the Great Recession of 2008 as the credit markets recoiled.

That could mean that 2022 might shape up nicely for those with a bullish risk tolerance.

Alternative investment 5: Private equity

Barrier of entry: High
Risk factor: High
Potential returns: Max

Embrace your inner hipster: Find the next big thing before it goes mainstream.

That’s private equity investing 101.

The key differentiation between private equity and publicly traded stocks is that stake in the company is not available to just anyone.

And just like the sharks, private equity firms generally invest in startups, privately held companies, and companies in distress.

They provide the capital the company needs, either to scale or overcome an obstacle, as well as ‘business management services’ (for better or for worse).

At the end of the day, the goal of private equity investment is to generate value and return for investors – and a lot of it.

The good news is, according to global capital management firm Bain & Company, private equity investments have generated a 60% higher return on investment compared to the S&P 500 over the last 30 years.

The bad news is that unless you spend your Wednesday afternoons on the golf course, private equity might be prohibitively expensive to get into.

A $250,000 would be on the lower end of the entry price to go through an institution – and to be properly ‘accredited.’ But keep in mind: that buy in is still the coach class, boarding group C of private equity.

Alternative investment 6: Hedge funds

Barrier of entry: High
Risk factor: Medium
Potential returns: High

Hedge funds are similar to private equity. They pool investors’ money and make strategic deals they’re betting will produce return. They’re also similar in that they require investors to be ‘accredited’ (read: a certified rich person).

Like private equity, a $250,000 minimum investment is par for the course. It can run many times higher depending on the firm.

The key differentiator between hedge funds and private equity is the types of asset investments they make.

Like private equity, hedge funds also buy stakes in private companies. But hedge funds investment strategies are more diversified.

They also invest in public companies, real estate, and tangible commodities that appreciate like gold, fine art, wine, and collectibles (rumor has it the hedge fund manager who bet big on beanie babies in the ‘90s is no longer in the business).

Big hedge fund managers are the celebrities of Wall St. – Ray Dalio, George Soros, and Bill Ackman. Those with the means to buy into their exclusive club can ride their coattails into the sunset.

Warren Buffett, is not a hedge fund manager. What makes him different? Unlike hedge funds, the average investor can ride his coattails…by buying public shares in his company Berkshire Hathaway – no ‘accreditation’ required. No wonder he’s America’s favorite billionaire.

But if you can swing it and meet the accredited investor criteria, hedge funds tend to be pretty hands-off investments. After all…you’re outsourcing managing that part of your wealth to someone else.

Alternative investment 7: Venture capital

Barrier of entry: Moderate
Risk factor: High
Potential returns: High

Venture Capital is what companies need to either kick off or start scaling. It is the earliest round of investing companies get as they start to dial up operations.

You can become a venture capitalist fairly easily thanks to angel investor sites. They allow you to browse through young companies seeking out capital. Many of them aren’t asking for millions. Some only need a few thousand to get through a financial bottleneck that’s holding them back.

If you’re seasoned in the particular industry, you could really hit it big as in the alternative investment space of venture capital.

But it’s important to understand that most businesses at this stage do fail, so. you are at risk of losing a large portion, if not all of your investment. Additionally, even if the company you invest in does ultimately achieve great success, the timeline you’d be operating on is long – several years, potentially a decade or more to see real returns from. As far as getting your investment back out earlier than that? Iffy at best.

So while Venture capital might be one of the highest potential alternative investment ideas, it also comes with quite a bit of risk.

Adding alternative investments to your portfolio

Now that you’ve expanded your view on potential investment opportunities, it’s time to consider if branching out makes sense to you.

If you’re portfolio is too concentrated in public equities and you want to manage your risk, allocating a slice of your net worth to a private REIT or other non-traded investment class will alleviate the pressure – and give you opportunities to catch big wins.

Parents, it’s your responsibility to teach your kids financial literacy or they’ll have to learn the hard – and expensive – way

Parents want what’s best for their kids, especially in regards to their future.

What a shame then, that one of the most highly correlated predictors of success in adulthood is one of the least talked about topics in the world of parenting – financial literacy for kids.

Financial literacy is on the decline

Financial literacy in the U.S. has been on the decline for the better part of two decades. The consequences of that have been the stuff of headlines.

The problem is likely to get worse: A study released earlier this year by the TIAA found that only 16% of Millennials qualify as financially literate.

And it costs them dearly….literally. On average, millions over the course of their lifetime.

But where there is a problem, there is an opportunity. In this case, that opportunity is that a comprehensive financial education becomes a strategic advantage in life.

After all, who wouldn’t want to give their sons and daughters a leg up over 84% of the population?

We all know things aren’t getting any easier – let alone what the future holds.

Don’t rely on school to teach kids about financial literacy

Only 21 states in the U.S. require personal finance coursework in public schools. Believe it or not, that’s actually a significant improvement from just two years ago.

Still, most requirements are minimal. A majority of states have no curriculum in financial literacy at all.

Like it or not, the reality is that the responsibility of financial literacy for kids falls squarely on their parents.

Financial education in the school of hard knocks

Most people earn their financial education the hard way: A slow, painful process in the strict and unforgiving classroom of the real world.

Lessons here come at a hefty price: deflated credit scores that haunt for seven years, debt that seems to never go down despite monthly payments (that aren’t always easy to make, especially in early adulthood), and tricky ‘offers’ that are essentially financial booby traps.

But in the depths of the convoluted fine print, most of these ‘offers’ capitalize on money management blindspots.

In recent years, the world of finance has grown even more labyrinthian – predatory even. Many products are specifically designed to exploit (and profit) from widespread gaps in financial literacy.

It’s a cruel and costly learning curve.

But parents who understand the importance of financial literacy for kids can flatten that curve. They can introduce basics on how to manage money at an early age. Then they can build on that foundation with more sophisticated concepts over time.

Financial literacy during the Wonder Years

Explaining how indexed annuities work to a 2nd grader will unsurprisingly be met with blank stares. But there’s no reason we shouldn’t expect the same from a young adult who hasn’t learned foundational concepts like investing, compound interest, and the importance of taxation timing.

Of course, not all at once. But the earlier a financial education framework is introduced, the more time the investment will have to mature.

Elementary years

As with all things in life, the basics come first and early.

That aforementioned 2nd grader probably can grasp the Bank of Mom and Dad depositing an allowance into an account.

Over time, an allowance account offers many learning opportunities on managing money – from delayed gratification (‘you can get the NERF ball now, or wait another 2 weeks to get that bike we saw’) to basic principles of fixed income.

Early adolescence

Parents can share visibility into an investment account as children enter early adolescence, such as a college savings account. That way, their preteen can see first-hand how small investments can lead to big payoffs.

Calibrate your expectations: Though they might not seem especially interested at first, once that investment grows into real money, they’ll likely change their tune.

This is also a great time to start familiarizing them with things such as personal credit scores.

High school

By the time they’re in high school, they will have witnessed what Einstein called the ‘eighth wonder of the world’: The power of compound interest.

From there, it is only a small logical step to understanding how compound interest can work against them in the context of debt.

But nothing quite beats the real thing. High school is also a time where kids start wanting big-ticket items, such as a car or a trip with friends. These wish list items can serve as the basis for the mechanics and implications of debt.

Their financial education can mature in tandem with them.

Parents bridge the classroom and the real world

What makes early exposure to financial literacy for kids so vital is the bridge it creates between the math they learn in school and how it applies in the real world.

Consider compound interest – arguably one of the most important engines in finance – is taught in 7th grade. It is not easy to recall when they’re applying for a credit card or deciding how much to contribute to their 401k.

But with first-hand experience watching an investment account grow over time, they’re more inclined to make financially savvy choices while time is on their side.

The idea is to find teachable moments along the way – life is chock full of opportunities to deepen your child’s financial literacy skills.

Financial literacy isn’t just math, it’s mindset

Understanding the numbers and math that go into financial products on the market today is an integral part of financial education. The more elusive piece of the puzzle is often the psychology around money management and growing wealth.

Financial philosophies, such as “pay yourself first” and “being poor is expensive,” aren’t taught in schools, even those that offer personal finance coursework.

But mindset, attitude, and strategy all impact wealth accumulation outcomes. Parents can help their children to see money as a tool, not a master.

Early bird gets the worm

Parents who want to see their children succeed shouldn’t rely on the school to teach them financial literacy. Instead, they have to take a proactive approach in their child’s financial education.

Perhaps the most important role a parent can play in their child’s financial literacy is helping their children bridge the conceptual to real-world application.

As with most investments, time is a variable. But kids have the benefit of time on their sides.

Early investment in financial literacy for kids ensures that when the time comes for them to fly the nest, they’ll have a little more lift under their wings.

Month: November 2020

Think outside the stock market: Alternative investments for 2022