In this article, I will cover 7 investments beyond the stock market that you can utilize alongside your stock market investments. Just as you should diversify what stocks you own, you should also diversify what assets you own as well. Beyond the stock market, there are a number of different assets you can invest in. The reason you allocate capital in these assets is because they offer different risk-reward relationships and are going to behave differently and at different times.
For example, what they often find with gold, is that it typically doesn't correlate with the market fluctuations. So, if the stock market is taking a nosedive, gold prices may actually be on the rise.
In short, you should avoid investing all of your money into the stock market and should look to diversify among different asset classes, such as the ones covered in this article.
Investment #1: Bonds
Bonds are probably the most boring investments out there. That is, if you don't consider savings accounts. Regardless, bonds are interesting investments, and in many scenarios they can be a profitable method of investment. However, it's very important to understand what bonds are before even considering investing in them.
When you purchase a bond, you are providing debt to a corporate or governmental organization and profiting from the accrued interest on that loan, which is paid by the same corporation or governmental agency. A bond is typically issued so that a company or government can finance projects and activities. Owners of bonds are considered debt holders or creditors of that issuer. Some are available in the publicly traded exchanges and others are private.
There are a few different types of bonds out there, but here are the three most common ones:
- U.S. Treasury bonds: Issued by the U.S. Treasury (known as T-bonds).
- Corporate bonds: Issued by companies to raise capital.
- Municipal bonds: Issued by local governments (states and municipalities).
U.S. Treasuries are the safest investment out there and are backed by the Federal Reserve (aka the Fed). So, the only way you would lose money on a US Treasury Bond is if the government were to collapse. If this were to happen, you'd probably have bigger problems to worry about.
To break it down further, if a company or government doesn't want to get a loan from the bank, they can issue bonds directly to investors and get a loan that way. The issuer of the bond, which is the company or government organization, issues a bond that contractually indicates the interest rate that will be paid to the investor. It also indicates the bond principal, which is the term used to describe the money loaned.
Bonds also have a date the money must be paid to the debt-holder, which is referred to as the maturity date. This can be thought of as an expiration date.
The coupon rate, or set amount of interest, is what you should be looking at when you're figuring out what you're going to be making on your investment. However, it's important to note that there are other factors as well such as whether or not the bond has a fixed or variable rate. If you're going to explore investments and bonds, which I do recommend in your path to achieving a well-diversified assets, I highly recommend investing in fixed rate coupons.
The actual market price of a bond depends on a number of factors, including the credit quality of the issuer, the length of time until expiration, and the coupon rate compared to the general interest environment at the time.
Bonds can therefore be an excellent asset class to invest in. As you get older, you want to take fewer risks with your investments and preserve your wealth. Stocks, being higher risk, have higher returns. Bonds, being lower risk, have lower returns. In general, bonds are safer than stocks and are not as volatile. If you invest with a financial advisor, or retirement-focused brokerage account, you'll likely be investing in a portfolio of stocks and bonds.
Generally speaking, a 20 year old may own 90% stocks and 10% bonds in their portfolio because they can take on the added risk, while a 60 year old might own 30% stocks and 70% bonds in their portfolio because they don't want all that added risk in their portfolio.
Investment #2: Commodities
Commodities are raw materials such as gold, silver, copper, or a primary agricultural product that can be bought and sold, such as coffee, oranges, and corn.
Now, to invest in commodities, you do not just stack up on a ton of coffee beans and hold them until you find a buyer for all the coffee. Trading commodities on an exchange gives you the ability to gain exposure to these asset classes without having to physically hold the commodities themselves. There are, however, a lot of commissions and taxes involved in trading commodities which takes a lot of technical understanding on how the commodity markets work.
I will not go in-depth on commodities. However, I will encourage you to have an investment exposure to precious metals, specifically gold and/or silver as you grow and diversify your investment portfolio.
In today's global currency, we have what's known as "fiat currency." An example of a fiat currency is the green-backed U.S. dollar. A fiat money is therefore currency that a governmental agency has declared to be legal tender, but it's not backed by a physical commodity. Gold and paper notes representing gold used to be the same thing. Today, they are not at all the same thing, with gold as a precious metal commodity used to gauge world market values on a comparison scale.
Point being, the reason why having exposure to gold and/or silver is so important, is specific to the world markets perspective. In other words, because the green-backed dollars are nothing more than an "I-owe-you," they can, in theory, be worth nothing in times of crisis (i.e., in times of hyperinflation).
Investment #3: Physical Real Estate
Real estate is a very popular form of investment. There are different property classes such as residential, commercial, and business real estate. There are also different methods of investment, with the two main versions being buying and selling properties and renting to tenants. Tenants is an industry term used to refer to the renter's of a property.
Buying and selling property can be very attractive to new investors. Someone who "flips houses" typically looks for a property that is priced low, fixes up the house on a given budget if necessary, and then resells the property at a much higher price than purchased.
Now, this works for a lot of people, but another great option is to rent to tenants instead. Someone who rents to tenants typically looks for a popularized rental property and looks to buy the property either all in cash or using someone else's money, such as through a bank loan. From an investor's perspective, the goal is for the monthly payments on the property to the bank to be lower than the rent your tenants are paying you.
Banks are very hard to receive loans from, which makes this form of investment a bit more challenging, especially to the new investor. This may improve over time but it's good practice to visit a bank and ask about getting a real estate property loan.
You'll typically be asked to put down a minimum of 20%. This means that 20% of the purchase price needs to be paid to the bank before they will give you an additional investment capital. For many new investors, this is a ton of money! So, you may want to keep an eye on the real estate market by asking your bank frequently on investment property bank loan rates and requirements.
Regardless, owning physical real estate is one of the best investments you can make if done right. This is because real estate allows you to take advantage of something called "leverage," where you can practically own a larger asset for a smaller amount of money.
Even though you don't own the entire property (the bank owns the rest), you are on the receiving end of the full appreciation of this property. In other words, you're in control of the whole asset (i.e., the house and/or land) and you earn the whole appreciation even if you don't own the entire asset. In short, this is why physical real estate is such a popular and wise investment decision.
Investment #4: Crowdfunded Real Estate
Crowdfunded real estate is a relatively new investment type, but it has great potential.
Private real estate is a highly sought after investment, traditionally with high barriers to entry, as mentioned earlier. The reason this is now available is due to changes to legislation which allowed for a new form of private real estate investing through crowdfunding.
There are a number of different platforms out there for investing in crowdfunded real estate but one great and popular choice is Fundrise. Fundrise keeps an eye on the hottest real estate markets to invest in. Often times, they will buy properties that are in need of being updated and then restore them. Afterwards, they'll either rent them out for the income potential or just sell the properties and capitalize on the asset appreciation.
As straightforward as this may seem, you don't want to dive straight into crowdfunded real estate. There are a few things you have to understand.
The main concept you should grasp is that your money will be invested into physical real estate buildings. Therefore, there's not going to be the same amount of liquidity, or ability to buy and sell as you have with the stock market. This is because your money is being used and deployed into real physical real estate property.
According to the Fundrise website, you should not invest in Fundrise or other crowdfunded real estate unless you have a minimum time horizon of five years. So, you should be ready to put your money into Fundrise and not touch it for five or more years. There are also a few different options you can select with Fundrise. These are supplemental income, balanced investing, and long-term growth.
It's important to keep in mind that Fundrise returns are not guaranteed, much like the stock market. However, Fundrise has a limited performance history as it has not been around for long. Regardless, crowdfunded real estate has a lot of potential, and with Fundrise you can get started with a $500 minimum.
Investment #5: Businesses
You may have been approached by a friend, family member, or loved one who comes to you and says: "I'm going to open up an amazing restaurant" or "I've got the next big idea and I'm looking for investors."
This is the epitome of small business investing. The catch being, there is typically very little data on any proof that the business will be successful. These businesses are often referred to as "startups."
The process will typically follow as such. An entrepreneur will present you, the investor, with a business plan. You then review the business plan consisting of their mission and vision statement for their company, the products and/or services it will provide, a potential marketing strategy, and the projected financials for startup capital usage and month-to-month expenses. This is usually projected from startup to recouping the initial investment and any operating expenses.
The goal as an investor in a business is to analyze the entrepreneur as much as the business itself. When you look at Mike Markkula, Apple's (AAPL) initial investor, his story makes it very clear that he not only recognized a revolutionary product, but even more impressive founders. Markkula's gut drove him to invest in not only Apple computers but in Steve Jobs and Steve Wozniak as well.
Investment #6: Cryptocurrency
Many people hear that there are millions being made in cryptocurrency. So, should you invest in cryptocurrency, such as Bitcoin, and if so, how?
For cryptocurrency, you can buy it through CoinBase, a very highly trusted exchange. You can also store your cryptocurrencies offline on a hardware wallet, which is an optional step if you're looking to be as safe as possible.
Now, I'm not recommending you invest in Bitcoin. I do, however, think the investment has great potential. But investing in Bitcoin, as you may already be aware, is an example of a very risky investment because of its volatility and because it's completely unproven as a currency and investment vehicle.
The interesting thing about Bitcoin, is the potential value appreciation of the investment. Bitcoin has the capacity to increase to numbers that are excessively valuable. This potential alone, makes many investors interested in this kind of investment. In fact, for over 1,200 years, Bitcoin has been the best currency investment. Furthermore, if Bitcoin were to be recognized as a world currency, the value of a Bitcoin today could skyrocket massively.
Regardless, Bitcoin is an investment that is more of a gamble than an actual investment strategy, at least in its current state. Again, I wouldn't suggest you dive right into Bitcoin but it's worth learning more about. Generally speaking, cryptocurrency is rather speculative which is why I would only recommend investing small amounts of capital, if any.
Investment #7: World Market Currencies (Forex)
This is one of the more complex versions of investment. There are tons of different countries with various currencies. For example, the U.S. Dollar is a currency. The Euro is another currency.
Trading currencies is basically trading one currency for another, profiting from the variation in price of the two. Some investors choose to hold their pairs (like EUR/USD), while others trade forex on a frequent basis. Regardless, they are betting that one currency will go up and the other will go down.
So, as an advanced method in the future, you can consider investing in various currencies as you can make profit if you know what you're doing.
The Bottom Line
Different assets will behave differently and at different times, typically due to news events and economic conditions. Therefore, investing in different assets is a move you should definitely consider doing when you get the chance.
In closing, as you become comfortable with picking stocks or investing passively through a mutual fund or an ETF, come back to this article and begin researching these different investment vehicles more in-depth. This will give you a large advantage over the many investors who only invest in the stock market, which is not the most optimal long-term investment decision.