But Aren’t Alternative Investments Risky?Most investors think adding the word “alternative” to investments sounds risky. This is not logical. The S&P 500 index dropped over 50% two times in the 2000s decade yet investors gladly poor money into stocks, often without enough knowledge, thinking it is safer than alternative investments. Change and acceptance some slowly but alternative investments are here to stay as the products that allow them continue to grow in the financial industry. A study by prestigious McKinsey & Company predicts that by 2020, alternative investments could make up about 15% of global assets in the financial sector and generate 40% of related revenues! This implies that alternative assets are growing in popularity among investors. While the McKinsey study refers to fund of funds, private equity, real estate, commodities and hedge funds, the implication is that alternative investment solutions will become as “normal” as stock and bond investing as investors need to build wealth given low interest rates and longer lives.
Why Alternative Wealth Solutions Are Better NowThe good news is that with the increased availability of information via the internet and the many ways that most investors can invest in alternative investments nowadays, it has never been easier to research and access alternative wealth solutions. It wasn’t that long ago that good investment research was available only to brokerage firms, and alternative investments were severely limited for individual investors. In this post I’ll cover various alternative wealth solutions that are available to most investors now while noting the experience I have personally had with most of these alternative investment strategies.
Cycle InvestingGiven that the price you pay for any asset is paramount to both lower risk and increase the probability of success, I’ll begin with cycle investing as the first alternative solution. This is important because almost every investment listed here can be an excellent alternative wealth solution at the right time in the cycle, and a miserable one at the wrong time in the cycle.
How to Build WealthRegardless of the asset type, the simple reality is that building wealth primarily comes from either:
- Selling assets at higher prices than you paid for them
- Investment income compounding over decades
Smart Beta and Factor InvestingSmart beta and factor investing are the buzz words for a form of investing that considers factors before investing. These factors include valuations and many factors that are a result of cycles. But smart beta and factor investing sound easier and less alternative than cycle investing so it’s easier for investors to buy into. Just think if you hired a wealth manager who said to you that he was putting you into cycle investing vs smart beta investing. For most people, cycle investing sounds risky and much like day trading but cycles last for years and are based on logic and math. But who wouldn’t want to jump into a “smart beta” fund? In good conscious, I begin with cycle investing in many of my posts due to the fact that investing at the wrong time in the cycle can ruin the very best investments, alternative or not. None of the alternative wealth solutions below work when the asset is bought at too high a valuation so looking at the overall economic and asset cycle is the place to start.
Real EstateMost people think of some form of real estate ownership as the primary alternative wealth solution. Since most investors own homes, and real estate can be touched and seen, it is assumed “safer” by many (The reality is that there are many factors that determine how safe real estate investments are, especially the cycle). I’ve personally invested in real estate mostly with success, but not always, so I completely get the safety issue here. Fortunately, the wins have been considerably more than the losses, but I learned the most from the losses, as we always do. There are many different ways to invest in real estate directly or indirectly including:
- Rental properties
- Short term rentals
- Buy and hold any type of property
- Investment property flipping based on cycles
- Fix and flip
- Home flipping every two years
- Buying property outside of cities in high growth areas
- Online lending
- Private real estate financing with first lien
REIT’s and MLP’sBoth REIT’s (Real Estate Investment Trusts) and MLP’s (Master Limited Partnerships) are considered alternative wealth solutions since they provide high income for retirees and are not stocks or bonds. Not only this, but by investing in either of these income generating assets with a consideration of cycles, these investments also have the potential to build wealth. The nice thing is that both REIT’s and MLP’s can be bought just like stocks in your brokerage account, making them very passive income investments. You can also sell covered calls against many REIT’s and MLP’s to double or triple the income. Individual investors have been able to invest in both MLP’s and REIT’s for decades. In fact, I recall my dad sending me a page outlining a couple of REIT’s from the Value Line Investment Survey® he had researched back in the early 1980’s. Many of those same REIT’s from the 1980’s still exist today. Note that the rise of online retail sales over the past decade has seriously threatened the retail REIT sector.
Selling Covered CallsCovered calls are one of my favorite alternative wealth solutions during sideways and bull markets. With covered calls, a call option is sold for extra income against stocks you already own. Covered calls are slightly less risky than owning stocks without calls sold against them, yet most investors think covered call writing has high risk since it involves selling options. You can read my post How Do Covered Calls Work here for more on this. Covered calls can also work well against stocks you already own at a low cost, especially in a tax–sheltered account such as an IRA. Again, the cycle is hugely important to consider before selling covered calls. Otherwise, the value of your stocks will go down during down trending stock markets. A few boutique financial advisors sell covered calls for their clients, but this is rare since it is a lot of work to manage writing covered calls for many clients. Plus, the higher option volume can affect the results when financial advisors sell covered calls. There are funds, however, that sell covered calls. Based on my experience, individual investors, can get double to quadruple the return by selling covered calls in their brokerage account themselves for “almost passive income”. This is because the high volume which funds must trade limits the income from selling call options. This is actually an opportunity where proactive individual investors can outperform professional wealth managers, which is sort of cool.
Buying Online BusinessesMore online businesses are being bought and sold each year, through more platforms and at higher multiples than the year before. While many online businesses are recession resistant, my experience has shown that a recession and a related bear stock market usually drops selling prices for most assets except U.S. Treasury bonds and some commodities. But I do think cash flowing online businesses are less prone to cycles than most investments. There is not enough history to confirm this, really. But there is logic, one of my favorite investing criteria.
Online Business MultiplesCash flowing small online businesses can be bought at significant discount to other income generating assets. This gives individual investors an opportunity to tap into private equity on a very small scale and inexpensively when compared to stocks. Many small online businesses sell for a multiple of about 3 times annual income, for example. Compare this to a public company stock selling for a multiple of 25, completely out of your control and subject to the whims of a bear market. Of course, investing in small online businesses is riskier than buying a publicly traded company, but you can do extensive due diligence on the simple accounting done by the seller or his CPA. The financial results of publicly traded companies, on the other hand, are hidden behind realms of data and accounting savvy. (Out of college, I did accounting at a NYSE company. I’m just sayin’). Venture firms are also getting into the business of buying small online businesses. This industry will only get bigger in my humble opinion. Think of it as an opportunity to own a global business for a small fraction of Wall Street multiples. This is another alternative wealth solution where proactive individual investors can easily buy online businesses while a financial advisor is not going to do this for you. As of this writing, I have not yet bought an online business, but I have built three (and counting) and am researching online business purchases now.
Alternative Wealth Solutions SummaryAs you can see, there are alternative wealth solutions for every investor who want to invest in something other than stocks and bonds. These solutions range from being slightly alternative, such as real estate REIT’s, MLP’s and covered call writing, to being very alternative, such as buying online businesses. Allow your net worth, the amount of capital you wish to invest, your skills, financial goals and your personal wealth plan guide you to the best alternative wealth solutions for you.
The information on this website is for education only and is not to be construed as personal financial advice.