There are the wildly popular if not overly simplified asset allocation models of investing in stocks and bonds. Then, there are alternative wealth strategies we know the wealthy use that can seem out of reach for us normal investors.
Are they really out of reach for us individual investors? If not, which alternative wealth strategies can everyday investors really implement? In this post, I’ll step you through how we first began using alternative wealth strategies, and the mixed results we got from doing so over the past fifteen years.
Most importantly, I’ll share the lessons we learned from both our missteps and our successes.
You’ll see that alternative wealth strategies really can work for everyday investors who are willing to make the extra effort required to implement them.
Alternative wealth strategies employ methods other than investing in stocks and bonds using traditional asset allocation models. Common alternative wealth strategies include investing in assets such as real estate and small business, as well as using tactical investment strategies focused on current opportunities derived from ever changing markets.
We used to invest almost exclusively in stocks and bonds using an asset allocation method. Later in life, however, we began tip-toeing into alternative wealth strategies over fifteen years ago when we saw we needed to look beyond stocks and bonds to create income streams and build wealth beyond traditional investing strategies.
Types of Alternative Wealth Strategies
There are many types of alternative wealth strategies ranging from exotic to slightly alternative. Don’t worry; the strategies we use are only slightly alternative ones.
Transitioning beyond investing in stocks and bonds, however, was a gradual shift for us because doing something different from what most people are doing feels unknown and risky. You may feel the same way if you’re looking to transition to more alternative wealth strategies after years of investing in stocks and bonds.
It’s hard to know where to begin. We began with the most popular alternative wealth strategy at the time, as you’ll see next.
Small Business Investing
The first alternative investment we explored was buying a small business outright. We investigated buying two local small businesses. We decided against this strategy, however, because the capital required was too high.
The reality was that if we bought one of these businesses, and made a mistake, we’d be back where we had been several decades earlier when we drove through the bank to withdraw $10 because that was all the money we had. We said “no thanks” to both of those local brick and mortar small business opportunities because the risk was too high even though the income was established and very tempting.
Oil and Gas Partnerships
The next alternative wealth strategy we explored and ended up buying into was an oil partnership. The partnership worked well to generate completely passive income over the following fifteen years and counting.
How did we find this investment? We were introduced to the person in charge of the oil partnership through a friend. We saw that the head of the partnership was clearly knowledgeable and experienced.
The investment was only for a small group of investors.
Lessons from Oil Investments
My husband, Larry, was knowledgeable about the oil industry, so we invested in an area he knew. This was one of our biggest lessons which you’ll see here several times. Knowledge is an asset that we often overlook when investing.
We also saw that it is hard to invest in a private oil partnership unless you know someone in the industry, so this won’t work for most investors. Local partnerships in other industries can make sense, however, so I write about our experience with this one.
Long after we had completely recouped our investment, the guy running this partnership ran into personal problems which slowed down the accounting and management of this investment. I mention this because it shows how important the person running any investment fund is, particularly since very small operations have no ability to slip in another manager when problems arise as large firms do. If this problem had happened a few years earlier, this investment could have been a loser, not a winner. Lesson learned.
Real Estate Rentals
The next alternative wealth strategy we tried was purchasing more real estate rentals. I had leased the condo I bought in my 20’s after marrying Larry, and that had gone well, so this was our next logical step.
The additional real estate rentals also worked well.
Our fourplex has generated a small positive cash flow while also increasing in value since the purchase.
Lessons from Investing in Real Estate Rentals
Even though we bought near the top of the real estate cycle in the mid 2000s, we found a property with positive cash flow. It did, however, take a lot of time to find properties that cash flowed during a real estate boom. After real estate market corrections, properties that cash flow are abundant. My big lesson here is to be patient and maybe even wait for the cycle to correct, whatever the investment. After four decades of investing, I have finally gotten this one lesson loud and clear.
Another lesson learned is that while there are tax benefits to real estate rental properties, those same benefits can result in a higher capital gain when the property is sold unless you choose to do a 1031 exchange.
The biggest lesson in hindsight, however, is that real estate rentals, when bought right, can pay for themselves over time. Later in life, rental properties that are wholly owned can be ideal for lucrative retirement income or sold for capital gains.
We invested in other properties through partnerships that did not work out. Unfortunately, the partners did not do what they said they would do and let the properties deteriorate. We did not know these people well. The properties were also outside of the state where we live making it hard to keep an eye on our investments.
Other lessons I learned from real estate investing are to:
- Practice patience and not rush into investments just because we’re ready to invest in an asset class
- Know our partners well
- Live in or at least have very good knowledge of the area where we invest
- Trust in our own abilities and insights over someone we don’t know even if it takes more effort initially
Real Estate Land
Just opposite of the above real estate partnership experience, we had success with two other real estate partnerships in raw land over the years. In these situations, we knew our partner well, and the property was very near our home one of the two times we invested in raw land partnerships; the other time, we knew the area well.
We also bought raw land solo (as a couple) and eventually sold it for a profit.
The goal with the land investments was wealth building over a few years vs long term income from real estate rentals. Buying undervalued properties was key to the success in these transactions.
Lessons for Investing in Raw Land Partnerships
- Buying undervalued quality assets in anything is often a good way to build wealth without tremendous effort
- Invest with good partners we know well
- Know the area where we invest
- Be prepared to wait until the cycles turns down before buying if necessary
- Explore ways to generate income from raw land
Covered Call Income
I fell in love with covered calls the first month I sold them making a 7% return in about 6 weeks on Investor’s Business Daily® stock picks. I repeated similar performance for about a year and I was hooked.
Unfortunately, another unexpected bear market hit only five years after the Dotcom bear market. The underlying stocks on my covered calls all dropped making it hard to sell covered calls near my cost.
Lessons from Covered Call Investing
I learned a lot from analyzing stocks and selling call options on them. Here are my biggest lessons.
Covered calls do best:
- In Bull markets
- In Sideways markets
- When we have or are okay with stock risk, anyway
- When we have other income streams
- When we can sell out of the money calls on stocks we already own at a low cost
- When there is diversification in both income streams and wealth building
The biggest lesson of all from this alternative wealth strategy: Always estimate the potential risk from any investment, lower it if possible, and be prepared for it. Make a conscious decision to have risk.
I’ve learned it’s okay for us to take risks. In fact, we need to take them to build wealth; they just need to be calculated and evaluated risks.
Small Business Partnerships
Unfortunately, there were a few hard lessons from investing in small business partnerships, too. We were connected to the small business partnerships through the same company as the real estate deals that didn’t do well.
In fact, the person running the company is still a popular investment “guru” (but I accept that I am responsible for my own investments as should everyone).
Small Business Investment Insights
- Haste makes waste. Don’t rush into investments because we have money to invest
- Partner only with people we know well (Lesson learned again!)
- Highly diversify startup small business investments due to their high failure rate
- Do extensive due diligence including having a CPA review the books
Online Business
After the slow and steady grind of investing in stocks and bonds for decades, and then oil partnerships, we saw they were all very capital intensive. This limited our ability to generate income and build wealth.
While our real estate rentals had done well and utilized some leverage through borrowing, we didn’t want to take on too much debt.
Buying into other people’s businesses hadn’t worked out for us, yet, small business investment was an alternative wealth strategy we wanted to try again.
Starting our own small business made the most sense. I came very close to starting a local antique business when the retail space for which I had been waitlisted became available. I wanted something I could scale, however, which wasn’t the case with an antique business.
The other business I was considering was an online financial education website. The internet had changed dramatically over the prior five years. Plus, I couldn’t get over the fact that online businesses required NO capital. Anyone could see that online businesses were (and are) the future.
Online business made sense for our next adventure into alternative wealth strategies, only this time without partners.
There was a lot of negative sentiment toward online businesses with the still recent Dotcom bear market when we first considered investing in them or starting our own. This reeked of opportunity yet it felt very intimidating, especially since I am not naturally tech oriented.
I decided to start learning about online business and began a financial education website for women after hiring a student to build the website. Several interesting opportunities gradually came from this but what I learned was as valuable as anything.
Larry was trading professionally in the European market, followed by traveling a lot while doing option consulting for businesses at the time. He was also trading options successfully himself on the side.
With two teen sons, life was hectic. Eventually, we decided to start a website where he could teach individuals to trade options based on his professional trading career.
The option education website grew quickly. It has continued to be one of our best alternative wealth strategies thus far. While it has required a lot of work, it has been rewarding, especially for Larry since teaching was the only other career he was interested in pursuing later in life.
Lessons Learned from Starting an Online Business
- Take advantage of unprecedented opportunities when they present themselves
- Try new opportunities even if we have no idea if they will work IF no capital is required
- Think WAY outside the box
- Test low capital ideas
- Build, learn and adapt along the way
- Choose strategies that provide income while also creating an asset
- Capitalize on our strengths and interests
- The narrower your niche the more your expertise
- We’ll do best in what interests us
- Use capital strategically
- Mix time consuming strategies with passive strategies
Buying Online Businesses
Now that I know a little more about online businesses, I see the opportunity in buying them. Online businesses sell for about three times annual earnings.
To put this in perspective, most publicly traded companies sell for earnings multiples between 17 and 50 or much more. Many public companies trade at 100 or 200 times earnings, or have no earnings yet!
While there could be more risk to buying an online business for someone who isn’t familiar with online businesses, the upside is much greater. Plus, the monthly income can far exceed dividend income from publicly traded stocks.
I have not yet bought an online business, but I have been researching and looking for some time now.
Tactical Investing Strategies
After investing through a few bear markets, we lowered our portfolio risk by using tactical investment strategies for our core portfolio.
Anything other than investing in stocks and bonds based on a standard asset allocation model is considered an alternative wealth strategy these days, so I include this strategy here.
Other Alternative Wealth Strategies
I don’t want to suggest this article covers all alternative wealth strategies. There are many more that we haven’t tried yet, such as lending money on real estate and small business, as well as cryptocurrency, timberland, and more. At this point, however, we are focused on improving and managing the alternative wealth strategies we have already implemented and the knowledge we have gained from establishing them.
How to Choose the Best Alternative Wealth Strategy to Start
Again, I remember how hard it was to know where to begin when we first wanted to implement alternative wealth strategies due to the lack of reliable information. This has improved slightly but it is still the case for the most part. There is a lot of unreliable information and get rich quick schemes.
Here is what I suggest now based on what I learned.
Clarify your goal for using alternative wealth strategies. Is it primarily to generate income streams, reduce risk, diversify, build wealth, or a combination?
Define a goal time frame so you can measure results from those goals. For example, a website you build yourself usually takes over a year to see meaningful income while selling covered calls on stocks takes less than an hour (after you learn how).
On other hand, real estate rental income takes months, if not a year or more to establish while an increase in value from a land purchase can take several years.
Next, note how your current skills can be maximized to get the results you want. For example, Larry’s bio was one of our biggest assets. By capitalizing on that, we were able to establish this somewhat unique alternative wealth strategy through our option education website.
Finally, don’t feel like you must limit yourself to one alternative wealth strategy. Diversification reduces risk.
Being strategic with time and capital will allow you to diversify. For example, we’re glad we have our mostly passive real estate rentals increasing in value on the side. In the meantime, we employ mostly passive tactical investment strategies while also running our more time consuming online businesses.
Don’t be overwhelmed by all the choices; we established these various alternative wealth strategies over the years. We preferred doing so over employment and committed the time and effort to it.
Alternative Wealth Strategies Summary
I get that we’re fish bait compared to the likes of the truly wealthy like Jeff Bezos or Ray Dalio. We obviously cannot do what they are doing.
What we can do, however, is emulate such leaders on a much smaller scale that works where we are at any given time capitalizing on our own skills and assets. Otherwise, we’re left to complain that we can’t do the same things that the Bezos and the Dalios of the world are doing.
You’ve seen our journey through the pains and gains of alternative wealth strategies. This is all information I wish I had over fifteen years ago.
Let’s remember, too, that Bezos began in a garage.
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