Three of the best investments you can make right now not only offer solid returns but good opportunities to diversify your stocks and bonds portfolio
It’s the new year and for many people, that means taking a new look at your investments. What worked last year might not work this year and there’s always the annual rebalancing to consider.
Here is a great lead-in to some popular investment options for 2018 including gold, real estate, diamonds, and public debt.
Many of these are spot on. Gold had its best year since 2010 in 2017 and is already up strongly this year on higher expectations for inflation. One of the largest diamonds ever found was recently unearthed which could spark investor sentiment for the precious stones.
These three investments might be ones you haven’t heard of yet but it’s these alternative investing ideas that might just boost your portfolio the most this year.
Real Estate Investing without the Headaches
Real estate is a great diversifier for a portfolio of stocks and bonds. Property prices generally rise along with inflation and the tax deduction from depreciation is one of the best you’ll find in investing.
Real estate investing isn’t without its downsides though. Real estate investing is not the passive income resource you are led to believe from so many websites and infomercials!
Unless you can afford to hire a property manager, expect a part-time job of maintenance and tenant headaches even with just a few properties. It’s also very difficult for individual investors to buy enough properties for diversification within real estate. Most investors hold just one property type and in one market, leaving them dangerously exposed to problems with that type of property or in their region.
Enter real estate crowdfunding.
Developers and large investors apply to raise funds for their real estate projects on crowdfunding platforms. The platforms scrutinize deals for developer history and property-specific factors before allowing the investment to go live on the site.
Investors can then choose to invest in individual properties, usually from $1,000 in each, in either a debt or equity investment.
There are a few reasons many people have started investing in real estate crowdfunding:
• The low investment requirement per property means you can diversify easily across property types and regions. Investing in multi-family, office, storage and warehouse properties across the country helps to diversify my residential rental portfolio.
• You don’t have to deal with any of the management hassles of direct ownership when you invest through a crowd-platform. You get professional management of the property through the project owner, usually an experienced developer or investor.
• You can plan your returns more accurately through a mix of debt and equity investments. Returns on debt investments are fixed while equity investments tend to average around a small range.
Real estate crowdfunding isn’t without its risks but they’re all manageable. Each platform has its own staff that conducts due diligence on each deal but still inspect offer documents before investing in any property. Most platforms are fairly small so it helps to invest in several to get access to a wider range of deals.
P2P Lending Investment: The 21st Century Debt Investing
Investing in peer loans has been around since 2008 but has only just begun to gain popularity. Investors still seem unsure of the new asset class.
Investing in loans is nothing new and you probably already have some money in them but don’t know it. Banks typically sell off their loans to insurance companies, pension funds, and anyone looking for consistent returns. The bank gets money to make more loans and the investor gets a stable cash flow.
To sell their loans, banks would sell hundreds of loans together through a broker that would then sell them to investors. Of course, the bank and broker each took a cut of the profits.
The only difference with peer lending investing is that the website connects borrowers and investors directly. Borrowers fill out an application and investors decide in which loans they want to invest, usually for as little as $50 each.
Peer loans are another good diversifier to a portfolio of stocks and bonds. They offer the fixed-rate and relative safety of bonds while delivering much higher returns than most fixed-income investments.
Some investors are afraid that peer lending returns will crash along with stocks in the next recession. Defaults on loans will indeed increase but not to the extent people fear. You can limit your loan investing to very safe borrowers, people with high credit scores, and stable finances. Some of these may default on loans in a recession but the majority will want to protect their credit rather than risk it all by defaulting on a small loan.
What to look for in safe borrowers and loans:
• Borrowers with mortgages – this not only means some financial stability but they also have a house from which they can draw equity to repay the loan if times get tough.
• Borrowers with debt-to-income less than 25% – means they aren’t already burdened by too much debt.
• Borrowers with monthly income over $4,000 – this means they likely have a good job and might run less risk of struggling to make ends meet in a recession.
• Loans less than $15,000 – peer loans are available up to $40,000 on most platforms but investing in smaller loans will make it relatively easier for borrowers to pay off their debt instead of defaulting.
Making a Social Change with Your Investments
The final investment isn’t necessarily a new type of investing but just a new way of thinking about your investments.
Socially-responsible investing (SRI) has been around for decades but never got much attention from individual investors. There are two ways you can invest, through a negative screen or a positive screen.
• Negative screens mean you avoid investing in any company that doesn’t comply with your values. This usually means companies involved in weapons manufacturing, tobacco, gambling, and sometimes fossil fuels.
• Positive screening means you look for companies that have been good stewards of the environment or social causes in which to invest.
Socially-responsible investing has gained popularity as a way for investors to use their investments to force important social change as well as to make money. Individual investors may not create much pressure on a company but the effect of platforms like Swell Investing and exchange-traded funds can force real change.
There is some evidence that SRI investing can produce returns over a market-wide strategy. Investing in companies that meet higher ethical and social standards may help to avoid legal costs that come with lower norms. Companies in weapons manufacturing, tobacco, and gambling are often the subject of expensive lawsuits that can erode profits.
Investing isn’t only about the individual investments but about how you invest. Putting your money to work in several different assets and strategies like real estate crowdfunding, p2p loans, and socially-responsible companies can help diversify your returns. Each of these investments offers an opportunity to diversify your portfolio and seek solid returns.