“Some people don’t like change, but you need to embrace change if the alternative is disaster.”
– Elon Musk
Investors have short-term memories, which is why so many cling to the stock market, even when it’s on a downward trend, or overdue for a correction.
If you have lost confidence in the market, or are simply looking for WHERE you can invest OUTSIDE of the stock market—safely and profitably—you’re not alone.
So why do even nervous investors still cling to mutual funds and stocks? We think it’s due to one of these reasons:
- “Already made up my mind.” They aren’t open-minded to try something new, even if they are unsatisfied with their current strategy.
- “Risk equals reward.” People mistakenly believe that the stock market roller coaster ride is required if they want to earn a good rate of return in the long run. (We’ve been well-conditioned to believe this! See our post about the insanity of risk assessment profiles.)
- “You don’t know what you don’t know.” Some investors just aren’t aware of other options. They lack the knowledge, confidence, and guidance to seek better alternatives. Or perhaps they are aware that alternative investments can be held in self-directed retirement accounts.
- “What will they say?” People have relationships with investment reps, planners, and advisors who don’t offer alternative investments (or who actively steer their clients away from them because they don’t understand them, don’t sell them, or both.)
- Inertia. Sometimes, people have educated themselves and want to try alternatives, but it’s easier to put it on your “to do later” list and convince yourself that the sky really isn’t falling (at least not yet), so why not just avoid the topic with your planner, spouse, parents or friends who aren’t as open minded as you a little while longer?
Let’s face it: typical financial advice tends to give very limited options, fixating on “how much of your portfolio should be in stocks, and how much in bonds.”
We say, “Neither of the above!” Stocks and mutual funds are ultimately nothing more than speculation, and bonds (depending on if you’re talking high quality bonds or junk bonds) range from “risky with fair returns” to “safe with weak returns.”
No, you’re not!
We’ve helped people with alternative investments since 1999, and I’ve been so happy with the results, I wouldn’t even consider selling mutual funds or other “typical” financial products again. (This is P4P founder, Kim Butler speaking, and for my personal story of how I left typical financial planning, see this article in the California Business Journal about my “Crisis of Conscience.”)
I also have “zero tolerance” for loss myself, and I want to do everything possible to never have to explain to a client why they lost money! (It has happened, but not often.) For this reason, I only recommend non-correlated assets which don’t rise and fall along with the stock market.
Below I list some of our favorite investments not correlated to the stock market. These investments have generated healthy single digit and low double digit returns for clients, without the roller-coaster ride of stocks.
Life Settlements: Perhaps the best investment for growth non-correlated with stocks
For those looking for excellent asset growth with minimal risk, life settlements are a very attractive option, offering investors a way to participate in the secondary market for life insurance policies.
Just as real estate deeds of trust can be bought and sold, so life insurance policies and the assets they represent are bought and sold on the secondary market. Life insurance has been considered an asset class since a Supreme Court ruling in 1911 judged that life insurance policies are private property that can be assigned or sold to others at the will of the policy owner.
Life settlements invest in life insurance by purchasing policies that have become unwanted, unneeded, or unaffordable to elderly policyholders. In this way, they represent a true “win-win” scenario.
Policyowners nearing life expectancy are able to turn a death benefit into a living benefit they can use now. At the same time, investors are able to purchase an asset with a sure future value, rather than grow an asset with an unknown, perhaps even lower future value.
Although most investors have never heard of life settlements, they have been used in institutional investing for decades. Some of the reasons life settlements have grown in popularity include:
- Returns are non-correlated. Life settlement investments are not correlated to interest rates, housing prices, stock prices, political events, or any outside influences.
- Almost no downside risk. Life settlements are based on actuarial math, not stock market speculation. As policies are purchased for a discount and costs such as future premiums are factored in, losses are unusual.
- Healthy returns. It is typical for investors to see annualized returns in the low double digits as the London Business School found, though results vary according to many factors.
- You’re in good company. Sources such as TheDeal.com have confirmed that Berkshire Hathaway and Bill Gates, along with major institutional investors, have invested hundreds of millions in life settlement portfolios.
- High Safety. Life insurance companies are among the strongest financial institutions in existence. Only seasoned and vetted policies are purchased for life settlements, and eventual benefits are literally “insured.”
Formerly for institutional investors only, there are now options for accredited investors (with a net worth of 1 million and cash flow of $200k or $300k for couples) to purchase private equity funds that hold life settlements.
As with any investment, it is important to understand how it works and who it is best suited for. Life settlements are not liquid and the investment time frame and exact rate of return fluctuate. Required minimum investment with our life settlement partners currently begins at $100,000, and money is typically invested for 7-10 years.
For more information, listen to this introduction to life settlements in “An Introduction to Life Settlements” on The Prosperity Podcast.
Commercial Bridge Loans: Our Top Investment for Cash Flow
Bridge loans on commercial and investment property can be an excellent choice for investors looking for immediate, steady, substantial income. Bridge loans also allow investors to capitalize on real estate without the hassles of being a landlord.
Also known as “hard money loans,” sometimes they are “rehab loans” as well (though not always), bridge loans provide temporary financing, usually for periods of about one year, at higher-than-typical interest rates.
Real estate investors are eager to secure these higher-interest loans from private lenders because it has gotten more difficult to obtain financing for anyone with less than perfect credit. These are not predatory loans made to homeowners, they are short-term loans made to other investors and business owners who need temporary financing and can demonstrate an ability to pay.
(We now also have a good source for investors to help home buyers who are leasing to own.)
Investing in carefully screened commercial mortgages and bridge loans can provide you with reliable monthly income with high single-digit and even low double-digit returns, with extremely low risk.
There are many benefits of becoming a private lender for bridge loans that make it worth serious consideration for anyone who needs income:
- Reliable: Monthly income payments often come directly from the company that sources the loans, not the borrower. In some cases, the company that sources and services the mortgages holds a secondary interest, which assures your best interests are represented.
- Secure: Assets are backed with real-world assets, often secured by first position deeds of trust. Loan-to-value typically doesn’t exceed 65% and is often lower, allowing for market fluctuations. Properties are valued and vetted by experienced professionals.
- Limited Risk: Although private investment mortgage funds can provide income for years, the underlying notes are held short-term (usually one year) to minimize risk in the event of a market downturn.
- Healthy Returns: Private lenders working with us typically earn a minimum of 7% and a maximum of 10, 12, or 14%, depending on if you are accredited and what is available at the moment that is a “fit” for you.
- Flexible: Bridge loan notes and funds can be held in a self-directed Roth IRA for tax-free income (within your IRA or in your pocket, if you are over 59-1/2). Funds can usually be rolled over into new loans for continued cash flow.
The downsides to bridge loans are that there is quite a learning curve to finding and managing your own loans, and when working with other lenders, not all operate according to industry best practices that make protecting your principal a top priority. (We ask a lot of questions of our providers and are choosy who we refer to!)
Four More Ways to Invest Outside of the Stock Market
- Start small (perhaps renting out your old home when buying a new one);
- Crunch the numbers, always focusing on cash flow and not speculating on and counting on appreciation;
- Get good help and advice, from a real estate attorney to a great handyman; and
- Always have adequate cash for the unexpected. (See #4 below for our favorite place to store cash.)
2. Fractional Real Estate Investing.
Accredited investors will find an opportunity to invest directly in commercial real estate by becoming private lenders for commercial projects, typically cash-flowing apartment buildings.
These types of investments offer qualified investors cash flow as well as equity, and help real estate investors avoid the most common (and most costly!) real estate investing mistakes. (Contact us for more details.)
3. Peer Lending.
Also called “peer to peer lending” or “P2P,” peer lending cuts out the middleman – the banks and credit card companies – and allows people to lend using online websites such as LendingClub.com and Prosper.com
For those who are just starting out, peer lending offers a way to start investing in a hands-on way, investing as little as a few hundred dollars. (At $25 per loan, you’d want to have your dollars in at least 10-20 loans.)
Returns are generally in the high single digits or low-double digits. See “Peer Lending: How Investors are Earning Double-Digit Returns… Helping Strangers!” for more information.
4. High Cash Value Life Insurance.
Life insurance is not an “investment,” per say, but it is an excellent place to store cash while also providing protection for a family. As a high quality asset, life insurance provides liquidity for families, businesses, real estate investors, major corporations, and banking institutions. As a matter of fact, banks now hold over $160 billion in life insurance, providing up to 25% of their essential Tier 1 capital.
Whole life policies constructed for maximum cash value are particularly attractive when one or more of the following is true:
- You’re committed to saving long-term. You desire to build equity and liquidity in a long-term savings vehicle that can outpace inflation and beat bank rates.
- You’d like to leverage your savings. You value the flexibility of being able to temporarily borrow against your savings for major expenses, emergencies, or lucrative opportunities.
- You have stock market holdings or other potentially volatile investments. Typical advice says to balance stocks with bonds, but for many, life insurance provides more desirable benefits and greater flexibility.
- Increased life insurance protection is desired. Because death benefits are permanent and grow with time, families with term life insurance are wise to replace their term with permanent whole life policies as they are able.
- Multi-generational wealth is valued. (There are valuable benefits to insuring adult children and grandchildren as well as yourself.)
An excellent primer on how whole life insurance can be an ideal foundation of a larger wealth-building strategy is my first book (recently revised and updated), Live Your Life Insurance.
Is it time for you to invest beyond the stock market?
Partners for Prosperity, LLC has helped clients “Build wealth without Wall Street” since 1999. We educate people about new ways to invest and help them SUCCEED in saving, creating income, growing assets and reducing risk… by investing outside of the stock market. We also offer a fee-based financial advising process for appropriate clients.
Reach out to us today and let us know how we can help you!
To find out more about our investment philosophy and strategies, download our free Prosperity Accelerator Pack and read our ebook, Financial Planning Has FAILED.
Your Partners in Prosperity,
Kim D. H. Butler