The stock market, of late, is not for the faint of heart. Unless you are tracking it on a minute by minute basis, it is difficult knowing where the individual equities you have selected are headed next. And if you are like most Americans, the vast majority of your investment dollars are parked in equities – whether individual stocks, ETFs or mutual funds. So, what should an investor do to both balance out that risk and hopefully improve the return on their investment? Diversify.
The opportunities have never been greater to explore fresh investment ideas, such as real estate, startups and even cryptocurrencies. Consider real estate. More than ever, buying property holds an allure for investors because you can achieve both rental income and value appreciation. There are a couple ways you can tap this asset class. First, you can enter into partnerships that purchase real estate investments. Second, you can issue loans to buyers and secure the loans with property. One of the most attractive things about real estate is that it is a tangible asset that you can stop by and actually check up on the property.
When considering physical real estate, there are a few basic categories to consider: commercial, multi-family and single-family homes. Each obviously has its positives and negatives. But one rule holds true – more work equals more reward. Commercial can be the least labor intensive since many businesses are closed on nights and weekends, additionally they tend to sign long leases and don’t move very often. But both these positives are tradeoffs against higher purchase prices and lower returns. Multi-family properties look great on paper, but experience higher turnover and more maintenance. The latter can eat into those paper profits. The last option is the single-family property. While mundane, these tend to appreciate steadily with a workload that fits between commercial and multi-family properties.
Startups are another fascinating option. These days, everyone has a friend or member of the family, who is building a business, or starting a brand new one. Investing in one or more of these businesses is a great way to diversify. If you are risk-averse and want to place a bet that has shorter-term horizon, consider making a small business loan. But a couple words of caution: Make sure you understand the business and engage a lawyer when creating a contract.
In addition, investing in a single startup is like investing in a single equity. Experts suggest spreading the risk by investing in multiple startups. “To mitigate the specific risks associated with startup investments, an investor must ensure that no single startup accounts for a significant percentage of his/her overall portfolio,” according to the website Investopedia. Rather, “diversify within this asset class to increase their probability of success and to offset expected losses in their venture capital portfolio.”
A trendier away to explore alternative investments is to invest in cryptocurrencies. The beauty of bitcoin is that it can’t be dragged down by economic forces that affect more traditional assets. As more consumers and investors embrace bitcoin globally, its growing value won’t be compromised by a bearish stock market, falling oil prices, or a weakening dollar. As David McCormick-Goodhart, a financial adviser with Savant Capital Management, a Rockford, Ill.-based wealth management firm, recently told TheStreet.com in an article, “there is nothing wrong with an investor putting a small piece of his or her portfolio in cryptocurrency as a speculative investment, but only after all other financial ducks are in a row.”
The article summarized the feeling of many, noting that “investors should be invested in multiple asset classes to avoid major corrections (in the stock market), and while adding bitcoin in an IRA or 401k is risky,” it does not mirror the stock market.
The good news is this investment strategy is not restricted to your active assets account. It is now easier than ever to diversify when it comes to your retirement accounts, thanks to the Self-Directed IRA and Self-Directed Solo 401(k). These vehicle allows you the ability to free yourself from traditional investments and diversify.
This strategy was recent written about in Inc. Magazine with regard to investing in startups, though the same strategy could apply to the other alternative investments. “Many new companies rely on friends and family to fund a startup or an existing company in need of capital,” wrote the columnist. “Those startups now have the option of going back to friends and family and telling them” they can utilize their retirement accounts, which benefits the startup and the individual, through diversification.