6 Alternative Investments That May Beat Stocks and Bonds Over the Next Decade

by Darwin on April 5, 2011

It’s been a while since I did an investing article, so I figured I’d delve back into the world of investing and share some ideas to broaden the investment options you may have previously considered.  Since we’re exposed to “stocks and bonds” continuously through our company-sponsored investment plans, nightly news updates and newspaper business section excerpts, a typical newer investor would think those are pretty much the only options out there for most people.  Depending on your interest in diversification, risk tolerance, time horizon and strategic objectives, there may be some benefit in checking out these other various types of investments:

  • Business Development Companies – I did a pretty extensive review of BDCs last year, but in essence, these are companies that provide funding to fledgling startups in exchange often, for a partial stake in the company.  So, these outfits are often much better suited to parsing through the winners and losers in the secondary market, providing funding and then paying out the returns in the form of very high yields.

 

  • Precious Metals – Gold and Silver are grabbing all the headlines of late, but you can lump palladium, platinum and on the periphery, even rare earth metals in there as well.  They’re pretty much all spiking, so one has to wonder whether we’re at the top of a bubble or in the midst of a secular trend that will run for years.  Proponents like to cite the fact that there’s a finite quantity of these materials on earth, versus our fiat currency system which allows governments to continuously print more money.  This confers increased value in terms of currencies to these commodities.  Either way, there are various ETFs out there for each.  Major ETFs include the gold bullion ETF (GLD), the silver ETF (SLV) and many more obscure and leveraged options.  Here’s a whole category on commodity ETFs to hit the softs, base metals, timber and more.

 

  • Secondary Market for Startups Like Facebook and LinkedIn – This isn’t for the faint of heart, but I did an article a while back on how investors can buy a piece of the next (or current, actually) Facebook, Twitter, LinkedIn and more.  You have to be an accredited investor to partake, but surely some people reading this will make the cut (I don’t!).  Some concerns in investing in non-public companies include lack of liquidity, very high transaction fees, lack of transparency and valuations.  There are shouts of a new tech bubble out there in the blogosphere, so there’s no guarantee these will mint money.  But each time I see a new secondary offering for Facebook, the implied value leaps by about $5 Billion (seemingly monthly).

 

  • InTrade Futures World Events – While it may seem more like “gambling” than investing, there is a futures market for everything here.  You can take a stake in whether or not we’ll bomb Iran or how big the next Earthquake will be.  There may be other legitimate uses for business owners and your particular circumstances, like hedging your gas prices or hedging against extreme weather events if you’re a farmer for instance.  It’s all there.  One problem I’ve encountered is that some of the markets are rather thinly traded so the bid/ask spreads are wide (costing you money).  For more detail, check out this detailed review of Intrade.

 

  • Real Estate Investment Trusts – Since it’s a huge up front investment and lots of hassle along the way to be a landlord, a quick and easy way to play the real estate market is through real estate investment trusts.  Due to their tax structure, they are forced to pay 90% of net income to investors through a dividend, so the yields are often quite high.  There are numerous types of REITs out there ranging from residential to commercial (see huge list of REITs by name and ticker).  You can often get a slightly uncorrelated return to major indices with a high yield.  If you believe the worst is behind us in terms of financial/credit constraints and you think we’re facing inflation, REITs may well outperform.

 

  • Life Settlements – Now here’s an interesting one.  I was recently approached to invest in life settlements which basically entails investing in the actuarial likelihood that a group of policyholders sold their life insurance policies will “expire” according to the statistical assumption when the purchase of their life insurance policy was negotiated.  In essence, when someone needs or wants cash up front instead of bequeathing a sizable insurance policy to heirs, they can sell the policy to investors up front while they’re still alive.  The investors pay the premiums and collect the policy proceeds upon death.  It sounds rather grim, but the yields are quite high at 7% or more, and completely non-correlated with stocks or bonds.  I haven’t pursued further at this point, but a co-worker is at the moment.

 

  • Peer Lending – Years ago, I used to routinely report on my earnings through Prosper.com, a peer lending outfit.  These days, LendingClub.com seems to have become even more popular.  Essentially, people with high interest credit, or near-term cash needs can borrow from folks like you and I for less – often 8-12% instead of the 20% or more they’d be paying elsewhere.  Many states don’t allow peer lending and there are obvious problems with defaults here and there.  But many of the bloggers I follow that are allowed to invest seem to be earning at least high single digit returns. Again, non-correlated with stock and bond returns.

Those are just a few of what I’d consider alternative investments.  They aren’t your traditional stock/bond mix, you can’t get them through your typical employer retirement plan, and they may well beat the indices over the next decade, especially considering how richly valued stocks and bonds are now.

 

What Are Some Other Alternative Investments You Like?

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{ 8 comments… read them below or add one }

1 Joe Schmoe April 6, 2011 at 10:49 am

Thanks for another great post, Mr. Darwin. How much do you invest with prosper.com?

[Reply]

Darwin Reply:

@Joe Schmoe, At this point none since my state outlawed it. A few years back, I had probably 5K at the peak. A few loans started to go bad as we went into recession. I believe the controls are better these days on borrowers, etc. from what I’ve been reading.

[Reply]

2 The New Value Investor April 7, 2011 at 9:21 am

I have also tried Prosper and found my results to be quite disappointing. During the recession, like you, many of my loans soured. But I suppose a return of around 0.05% annually is better than the S&P’s continual negative performance during the same time period. That being said I wasn’t thrilled– my state outlawed it, and then I eventually left the country and haven’t considered Prosper since.

I agree with your sentiments about REITs. I think that REITs provide excellent income and for the cashflow-minded investor they will prove to be an excellent investment in the future.

Warm regards
The New Value Investor

[Reply]

3 ross April 14, 2011 at 5:16 pm

Lately i’ve been looking at website portfolios as investments. If you think about it, they are just a type of intellectual real estate. The internet will always be changing and evolving, but the basics of how it works will probably remain the same. Radio and TV have been around for years, but not a whole lot has changed in how we watch or listen to it.
I know that technology will always be fast moving, so that will make it unstable. But i can see websites earning for at least 5-10 years without any major changes.

[Reply]

4 شات April 15, 2011 at 4:40 pm
5 Katie April 25, 2011 at 6:46 pm

I agree that REITs can be a good choice for alternative investments, more so private or non-traded REITs. These REITs are not traded on the market so they can make for a better investment risk wise. There are a lot of private REITs, one I know of is a Cole REIT. The Cole REIT invests in retail, office, and industrial real estate; which makes it have a more diversified portfolio than some REITs.

[Reply]

6 Financial Success for Young Adults June 28, 2011 at 11:36 am

I’m definitely looking into MLPs as a way to diversify. I’ve got to do some more research though because all I really know right now is the definition. And as always, I throw in forex for good measure.

[Reply]

7 Big Spender July 2, 2011 at 7:17 am

I have about three dozen loans on Prosper.com and only one has ended up in default. The rest are paid as agreed and earning rates of about 9%. Yet my friends think I’m crazy for investing in P2P.

I think they’re crazy for keeping their money in savings accounts earning less than one percent.

[Reply]

8 DEBRA TAVELLA June 9, 2012 at 4:49 am

I am doing a competitive analysis for my research firm; with primary focus on mining & investing. I got to know about Stephen Dattels . He is the successful business man & has mining & investment firms across the world. Does anybody know companies that do survey?

[Reply]

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