The stock market isn’t the only option for making worthwhile investments, and since the recession, alternative investments are on the rise. Many see the stock market as too complex or risky, so they seek alternatives that appear more straightforward and secure. Some choose to invest in themselves, opting to spend their money on education or owning their own business. Others prefer to invest in commodities such as gold or silver.
Despite the benefits of staying away from the stock market, investors should be cautious with newly popular alternative investment opportunities, as these can easily take a turn for the worse. Jonathan Clements of The Wall Street Journal warns that history isn’t necessarily the best guide to which investments will succeed in the future. For example, gold stocks, real-estate investment trusts (REITs), and commodity funds were hurt by the recession. “As these investments become more widely owned, their performance may be more like the broader stock market,” he adds. Clements also stresses the importance of rebalancing your portfolio.
Ultimately, investments come down to a trade-off between risk and payoff. And it is largely accepted that diversifying your portfolio stands to help reduce risk and increase payoff. The best investments, considering the current economic climate, are always up for debate. But it’s essential to recognize that you often cannot predict what the market will look like down the road. Thus, every investment comes with a certain amount of inherent risk. But if you are looking to invest without playing the stock market game, here are some worthy alternatives to consider.
1. Savings accounts
While you certainly aren’t going to get rich on the interest gained from a savings account, it’s a very secure, low-risk option that will produce a small amount of interest. Particularly if you are a member of a credit union, interest rates may be better than you think. Plus, withdrawals from the account will not be limited, so if you need to borrow from your savings you know it’s there for you anytime, without penalty.
2. Savings bonds
There are two types of savings bonds issued by the U.S. Department of the Treasury. Series EE bonds pay a fixed interest rate, and series I bonds pay interest adjusted for the rate of inflation. If you redeem bonds in the first five years, there will be penalties, but in the long-term, savings bonds can produce a healthy return for such a low-risk investment. While savings bonds were traditionally issued on paper, the Treasury is phasing these out in lieu of electronic bonds that can be purchased via TreasuryDirect.gov.
Certificates of deposit are bank-issued, long-term savings investments. According to Nolo, interest rates on CDs are fixed and typically higher than on savings accounts. However, CDs require a commitment to leave the money on deposit for a fixed period of time, and there are significant penalties for cashing in a CD early. A series of certificates that will mature at different points over a number of years, or a CD ladder, can be used to spread out returns over time.
4. IRAs and 401(k)s
An IRA is simply a platform for investment, so the amount of risk associated with it depends on how that money is invested. Steven Dolvin, Ph.D., CFA, associate professor of finance at Butler University, explains, “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.” IRAs can be low-risk or high-risk depending on where the funds are invested. While Roth IRAs can offer more accessibility, if you withdraw money from a traditional IRA before retirement age, penalties and taxes will be applied.
While 401(k)s have the benefit of being tax-exempt when you invest the money, some argue 401(k)s can be a rip off due to high costs, poor investment choices, and bad behavior on the part of plan managers. But if your employer offers to match all or part of your 401(k) contribution, most would advise participating. If you leave your job, your 401(k) can be rolled over into an IRA.
5. Real estate
Real estate is attractive to those who prefer to invest in something tangible. If you are knowledgeable about the realities of the housing market, investing in real estate may be a good option. Some choose to purchase income property, which can be used for regular rental income. Buying shares in a REIT is one way to benefit from property ownership without becoming a landlord, although some argue this option isn’t a far reach from the stock market.
6. Peer-to-peer lending
Peer-to-peer lending is a newly popular investment opportunity, so it should be approached with caution. That said, many investors are seeing decent returns with websites such as Lending Club and Prosper. Essentially, investors lend what could be very small sums to peers, and they pay it back with interest. The risk with peer-to-peer lending is that your loans can go into default, which leaves you at a loss. However, when you decide to invest a certain amount of money with Lending Club or another lending site, you can split up that sum among many borrowers, thereby keeping your portfolio diversified.
7. Commodities and collectibles
If you are looking to invest in something a little more concrete, there are a number of options besides real estate. Some choose to invest in gold ETFs, so they don’t have to worry about stashing actual gold in the closet. Gold and other commodities can be risky, but there are other options such as cars, art, comic books, and antiques that — for knowledgeable investors — can mean a healthy payoff. Putting large sums of money into collectibles could be unwise, especially in uncertain markets, but as a small-scale hobby, these alternatives might bring investors more enjoyment than typical investments.