Alternative Investments: If Not the Stock Market, then What?

“The individual investor should act consistently as an investor and not as a speculator.”
-Benjamin Graham

As we saw in our last post, the truth about the stock market has been obscured for too long. Mutual funds and stocks, the mainstay of most retirement plans, represent more risk for less reward than has been assumed. However, investors are waking up to these inconvenient truths. They’re searching for stock market alternatives, and they’re taking their money elsewhere.

In August of 2012, CNN Money reported that trading volume was at a five-year low, but the lows got even lower as the 2012 progressed. Hurricane Sandy and the unexplained price swings that followed did the market no favors, nor did the Fiscal Cliff drama. In spite of a nice gain in 2012, investors no longer trust the market.

Clearly, it is time to expand our options beyond Wall Street. It’s time to utilize new and old investment vehicles to provide solid returns without unnecessary risk and speculation. It’s time to make investing outside of the stock market the norm, rather than the exception.

But if not the stock market, where do you put your money? Consider your answer to this question carefully, because the ramifications can be enormous. Here are a few traditional and also non-typical alternatives:

Bonds? While bonds are not without risk, fluctuate with interest rates, and yes, can lose money, their track record as a safe investment is admirable. Seen as the lesser-performing, duller counter-part to stocks, bonds have actually out-performed stocks in the last ten years (which says more about the poor performance of stocks than the profitability of bonds.) Still, bonds remain a popular choice for investors wanting investment income that won’t roller coaster like stocks while producing better returns than savings accounts.

Unfortunately, bonds are too popular, in that many financial planners fail to stretch outside the stock-vs-bond box. “Are you young or do you have a higher tolerance for risk? We’ll put you in 90% stocks, 10% bonds. Have you retired or are you a conservative investor? We’ll choose a bond-heavy portfolio. Somewhere in between? We’ll split the difference between stocks and bonds.” It’s no wonder that so many investors remain unaware of alternative investment vehicles! We encourage investors to look at investments beyond the box.

Real Estate? Depending on who’s doing the survey, between one-third and four-fifths of “the wealthy” (millionaires on up) invest in real estate aside from their own primary home. And according to the latest Millionaire Corner research on the investment preferences of affluent Americans, interest in real estate investing is on the rise, even as other studies show that wealthier investors are pulling their money out of stocks.

Whether rental homes, second homes, apartments or commercial real estate, real estate assets allows investors to enjoy leverage, tax benefits, and the security of a “real” investment. Not sure you want to be a landlord? You can have others manage your properties for you, just structure your deal to allow for adequate cash flow.

Another real-estate related option is to invest in bridge loans, or short-term financing for (particularly) commercial and investment real estate. You won’t have the leverage of a landlord, but you also won’t have the headaches! Bridge loans can produce a nice return on a short-term investment, ideal for those looking for cash flow who would prefer not to lock up their principal for many years to come.

Life Settlements? For accredited investors, investing in life settlements or life settlement funds (also known as senior settlements) may provide the desired returns and protection from the market. Life settlements involve the purchase (often in fractional ownership arrangements facilitated by a third party) of life insurance policies that have become unwanted, unneeded, or unaffordable to the policyholder.

Much like selling a deed to a piece of property, elderly policyholders sometimes sell their permanent life insurance policies. This gives them cash they need now, while the investors (who continue paying the premiums) become the beneficiaries of the policies.

For those who want the chance of a higher return without risk, life settlements are a great option. Returns can be in the double digits, and the principle couldn’t be safer in a savings account. However, life settlements are not liquid and the investment time frame and rate of return are unpredictable. As with any investment, it is important to understand how it works and who it is best suited for.

Whole Life Insurance? Even more so than bonds, cash value life insurance is a great hedge from the market and is recognized as one of the safest places you can put money. Increasingly, banks are putting more and more of their assets into permanent life insurance, which is used largely to fund bonuses and pensions. According to a Wall Street Journal analysis of bank filings, “Banks had a total of $122.3 billion in life insurance on employees at the end of 2008, nearly double the $65.8 billion they held at the end of 2004.” And the trend continues, with bank-owned-life-insurance (BOLI) increasing 8.7% from the first quarter of 2011 to the same quarter in 2012.

And it’s not just banks. According to a U.S. General Accounting Office report, a survey of Fortune 1000 companies found that about two-thirds of the companies that fund nonqualified deferred compensation plans and nonqualified supplemental executive retirement plans do so using business-owned life insurance.

Perhaps Americans would be wise to do what the banks and big corporations do and leverage their cash value (and yes, even their death benefit) to create income streams and build financial security. With strategies such as those outlined in Kim D. H. Butler’s powerful little book, Live Your Life Insurance, life insurance becomes an asset to be used by the policyholder now, not just money for surviving beneficiaries. As the book asserts, “The first beneficiary of your life insurance policy should be YOU.”

Start a Business? Forty-seven percent of millionaires are business owners, over double the twenty-three percent of millionaires who invested their way to wealth while working for someone else (usually as a skilled professional or manager.)

In Killing Sacred Cows, Garret Gunderson shows how your 401k might be actually keeping you from wealth! We are sold the model of accumulation as the way to financial independence, when wealth building is about utilization of our talents and assets to create value. Money then becomes the by-product of creating value.

Gunderson says business ownership, or self-employment, is one of the keys to wealth, not picking the right mutual funds. Starting a business allows you to find and expand your own prosperity rather than just be an investor in other people’s companies who you will never even meet.

Invest in yourself. Prosperity isn’t something we save up for to enjoy in our golden years; it’s a way of life that pays dividends all along the way. Whatever you choose to invest in, use your finances to grow yourself as well as your assets. Learn a new language. Travel to a new continent. Become an expert. Write a book. Create something. Not only does this give purpose to your life, but as you grow your skills, knowledge and confidence, you’ll grow your own ability to build a life of prosperity.

Do you want to know more about alternative investments? We can help! We’d love to share with you the specifics of life settlements, bridge loan investing, or even show you a case study of how a client purchased a great rental property using their whole life insurance policy. Contact us for details about how you can escape the mutual fund rut and use proven alternatives to the stock market to build wealth without unnecessary risk.