I have a friend who enjoys horse racing. Well, to be precise, I have a friend who enjoys betting on horse races.
When we go to Las Vegas, we like to spend an afternoon at a sportsbook. We pool our money and he picks a few races. On any typical trip, we sit down with $100 and leave with $90 – $110… with a few close races to make it exciting. Not a bad way to spend an afternoon.
While I enjoy an afternoon hanging out with friends at a sportsbook, owning a race horse is one of the income producing assets I'm
probably never going to own.
Like with owning a boat, it's more fun knowing someone who owns a horse rather than actually owning one. (I don't know anyone who owns a horse, but I can attest to the boat!)
That said, I have been keeping my eye out towards alternative investments.
It's important to know what's out there and I enjoy reading about weird alternative investments. Equities are good investments but they are also boring. How many articles about how low-cost Vanguard funds can you read? 🙂
What is an alternative investment?
What is an alternative investment? An alternative investment is anything you can't buy in a standard 401(k). Stocks, bonds, and cash are not alternative investments.
For most people, their biggest “alternative investment” is real estate. You can own real estate in a 401(k) through REITs and mutual funds, but you can't own the deed to a property. You have to set up a special structure if you want to invest your retirement savings in real estate property. You also can't own gold bullion, art, or other collectibles.
Boo… but that's mostly for your protection. 🙂
Do you need alternative investments?
The key to investing is diversification.
You don't want to be overexposed in any one area.
It's why experts recommend you get an appropriate mix of stocks and bonds. It's also why you need a good mix of domestic and international, so the woes of any one nation don't sink your fortunes. It's also why experts recommend some part of your portfolio to be in alternative investments.
In theory, alternatives aren't supposed to be strongly correlated with the stock market or many external forces. They may be negatively correlated, as often is the case with gold and the stock market.
Alternative investments are often used as a hedge against the rest of your portfolio.
How much should be in alternative investments?
This is a challenging question because alternative investments are so different. They are not perfect substitutes for one another.
Miscellaneous investments may be a better term! Real estate is nothing like art. Art is nothing like mineral rights.
That said, experts will say that you should anywhere from 7-12% in alternative assets. Real estate is an alternative investment. For many, home equity is a huge percentage of their net worth… so many people already have huge exposure to real estate and not know it.
When I looked at my Personal Capital account, they said 10.5%.
My actual? Faaaaar less:
When it comes to investments, I'm a boring plain vanilla type of guy.
But it would be fun to see what's out there. 🙂
What are the best (and fun) alternative investments?
Ahhh, now to the fun stuff!
I'm going to present a list of fun alternative investments.
Some of these are a little odd… but that's part of the fun. Remember, THIS IS NOT AN ENDORSEMENT OF ANY OF THEM! 🙂
I discuss general real estate in the next section but farmland is a special subclass that I think deserves special mention. It's been traditionally very difficult to invest in land, especially farmland, because there haven't been many platforms that appeal to that market. Farmland has had a very good run since 1990 and $10,000 invested in farmland in 1990 would be worth $199,700 today. The S&P 500 grew about 13X over that same period (including dividends).
There's on new company that is hoping to change that – they are named AcreTrader.
What's been most interesting is that farmland returns are relatively stable over that period. Whereas the stock market can jump up and crash pretty violently, farmland is a slow climb upward as an asset class. It's boring but I really like boring as long as it goes up.
With AcreTrader, they research the farmland, select less than 5% of them, and create a legal entity into which you can invest your money. When you invest, you become an owner of that farm and this is all done 100% electronically. AcreTrader pays out excess income (3-5% for low-risk properties) and charges a flat 0.75% fee of the farm's value, usually deducted from the income. Their target unlevered internal rate of return is 7-9%.
You can read a more detailed look at Acretrader in our review.
It's fascinating and you can get a free account to see what they offer at AcreTrader.
I remember when I heard the story of Steve Wynn (of the casino empire) put his elbow into Picasso's painting titled ‘Le Rêve.” He had planned to sell it to a hedge fund manager for $139 million in 2006 but the deal fell through after Wynn put a silver dollar-sized hole in the painting. Turns out, that hedge fund manager bought it a few years later for $155 million. Elbow or not, fine art appreciates.
If you want a piece of fine art, one of the few ways to invest in this asset class is with a company called Masterworks. Much like crowdfunded real estate, Masterworks lets you buy small ownership stakes in pieces of art.
How it works is they buy “blue-chip art” and then sells shares at $20 a share. When they purchase a painting, they'll also file an offering circular with the SEC so you're protected by securities laws. They charge a 1.5% management fee plus 20% of any future profits. They look to exit each holding after 7 years and at most 10 years.
We recommend reading our complete review of Masterworks if this investment interests you.
Last summer, we spent a couple of weeks in the Tuscany region of Italy. We went to several wineries and were amazed at how good the wine was and how inexpensive it was. The vintners told us that the vast majority of Italian wines are consumed within the country – very little of it is exported abroad.
As we toured various vineyards and learned more of the history, it became obvious why wine collectors exist. Each year, a limited number of bottles are produced and when the winery is popular, or the vintage is excellent, the value of each bottle increases. As time passes, fewer and fewer of these bottles exist. Art is, theoretically, forever as you don't consume it to enjoy it… but wine is not.
There's a new company, Vinovest, that looks to bring investing in wine to the masses. Through the platform, you can buy bottles, have them shipped to their storage facilities, and truly “invest” in wine without all the hassles and difficulties of storing the bottles yourself. If you want your bottles, you can ask for them and Vinevest ships them to you. It's a fascinating model.
There is a $5,000 minimum and you can find out more at Vinovest.co.
Real estate is the most common of alternative investments.
Owning a home is part of the American Dream. Your home is where you live but also an investment. If you sell your home for a gain, you owe taxes on it (after the home gain exclusion).
As the saying goes, they aren't making any more land. So, many investors think of real estate when thinking about how to expand their portfolio.
If you don't want to buy property, either to hold or to flip, there are other ways to get involved in real estate. You can invest in property through a crowdfunded real estate site.
Or, you can become a hard money lender to another investor. This is when you loan someone money and the property is collateral for the note.
Behind real estate, precious metals are the next most common alternative investments. They're often seen as a store of value, which like having a little insurance policy.
You can invest in precious metals through ETFs and mutual funds or buying bullion. If you're hoping to use it as a store of value, bullion is the way to go.
If you simply want it as a hedge investment, you can invest in ETFs or you can invest in mining companies.
If you want bullion, you can buy that close to the cost of the precious metal from a dealer online. Or, there is a class of precious metals known as “junk silver,” which refers to the silver content of common coins. The value is in the silver content and it is often not pure silver. These are often older coins, think pre-1960's, when coins had more silver.
On my desk I have a silver quarter, made in 1957, that is worth around five bucks. It's a collectible, valued for its materials, and I found it in a field. It stood out to me because it was a quarter in a field but it looked really dull. The dullness was because of the metal composition, 90% silver, and now it's my little foray into numismatics (and a reminder to be observant!).
Venture Capital/Angel Investing
I'm bad at it. If I was early on Facebook, Uber, Airbnb or some other unicorn- I'd be singing a different tune.
For angel investing, it's quite simple – you have to find a business to invest in. You can sign up for websites that look to connect angel investors with companies. You can also go the old-fashioned route and network with entrepreneurs.
If there are business development or technology groups in your area, join them. New companies often go to those groups to find funding, mentors, and other support. If there is a tech hub or any kind of startup accelerator, give them a call to find out if they have events you can attend.
With venture capital, you give your money to a venture capitalist and they find the deals for you. You pay for this through a management fee (usually a percentage of assets and a percentage of gains), but you get access to their deal flow rather than building your own.
Now we're getting a little more exotic.
Cryptocurrency is enjoying its moment in the sun right now and even though I don't care that bitcoin is hot, many are.
Money is a store of value and a means of exchange. Your dollars only have value because the US Government supports it and because you can spend it. Cryptocurrency has no central bank to prop it up but it is being accepted more and more, which contributes to its volatility. A dollar and a bitcoin and a gold coin all have value because you can spend them.
Like any new commodity, no one knows how to price it and no one knows what it's “really” worth. This creates some volatility and traders LOVE volatility.
So, if you want in, here's how to buy cryptocurrencies.
The list goes on.
These all fall into a category known as collectibles.
When I was younger, I loved comic books. My favorites were Spider-Man, X-Men, and the Fantastic Four.
I would tell my mom that those comics would be worth something one day. My mom would always tell me they're only worth what someone will pay for them. They're sitting in a box in the basement now … BUT ONE DAY MOM! 🙂
Most collectibles are too mass-produced to be valuable. Many of the toys that are valuable today are only valuable because they survived. I used to play with my toys and that usually doesn't help them stay valuable. Or in one piece!
The most valuable baseball card in the world is the T206 Honus Wagner baseball card made by the American Tobacco Company. You can watch documentaries about this card, worth over three million bucks, but very few collectibles ever reach this point.
The most valuable stamp in the world is the Treskilling Yellow. It's a Swedish postage stamp with a color error and it is one-of-a-kind. It's estimated value is $2.3 million!
It's hard to look at different types of collectibles and try to come up with a blanket rate of appreciation. All we know is that they often lag the stock market.
Sometimes even inflation.
But the fun of collectibles isn't in the rate of return. It's in owning a rare item as well as how it may appreciate.
It's like a lottery ticket you can admire and less like a share of stock.
Seriously… burial plots.
Yep. You can buy and sell burial plots. Those rectangles of land in a cemetery.
If you can get past how morbid this sounds, it's no different than any other kind of real estate. There isn't a Redfin for burial plots, so the data gathering is a bit harder, but you can buy and sell burial plots like any other piece of property. One of the best places to look happens to be Craigslist.
Here's a look at what was available near Baltimore, Maryland:
Prices will vary based on the area. They run anywhere from a few hundred bucks for a plot to a few thousand, based on location. When you buy or sell, it's coordinated with the cemetery's representative.
Oh, and here's a little bit of morbid humor. Sometimes a listing will say that the plot is “used” or “pre-owned.” Yikes.
That's usually an error on the part of the seller. A cemetery won't bury someone in a plot that's already being used. 🙂
I'm not sure what the returns are on this type of investment but it's fascinating it's even a possibility.
Ok, this isn't all that fun but this was something a friend of mine asked me about and I include it on this list so I can dissuade you from doing it.
The basic idea is that Forever Stamps will continue to go up in value over time. You buy them for the cost of first-class postage today, which is fifty cents.
As postage gets more expensive, your stamps are worth more because you locked in a lower price.
Before getting into the numbers, the logistics of this are bad. Where will you be able to sell the stamps? To friends? To a business? How will they know these aren't fake if you don't already have an existing relationship? Will the transaction costs eat into the profits and make this a losing (or at least poor) proposition?
Finally, the math says this is silly. If you look at the price of a postage stamp over time, the increase has lagged inflation. In 2007, USPS introduced the Forever Stamp when the price of a stamp was 41 cents. 11 years later, the cost of the stamp has risen to 50 cents. That's an annual rate of increase that slightly lags inflation… and that's before taking into account transaction costs.
This is an option… but a bad one.
Have you ever seen There Will Be Blood with Daniel Day-Lewis? If you have, then you know about mineral rights.
If you own property that sits on valuable natural resources, you can sell the mineral rights to a company who will extract those minerals. While the term is minerals, it can be anything from rocks to oil to gas to some other precious resource. The most valuable minerals are the ones you expect – oil, gas, gold, copper, diamonds, and coal.
People who own mineral rights may be looking to turn their stream of income into a lump sum payout. You can potentially buy their rights, collect the payments, and earn a lucrative return.
It can be a very competitive world so do your due diligence before you buy or sell mineral rights.
Pop Culture Collectibles
When I was a kid, I played a lot of Magic: The Gathering. I started around the Revised Edition period (1994) and still have a box of cards in my basement that spans the Revised to Ice Age period, with a few earlier cards mixed in. As you would expect, these cards now have a little bit of value.
One of the valuable cards, due to its rarity, was Black Lotus. Collectibles are always a sexy alternative investment but pop culture collectibles are even more so because of the close emotional connection. I know how coveted the Black Lotus was even back then – so it comes as no shock that you can buy shares of an Alpha edition Black Lotus currently valued at $90,000 on Mythic Markets.
Another similar company is Otis, which lets you invest in sneakers, collectibles, and contemporary art.
In summary, this is only a sprinkling of some common and some offbeat alternative investments. There are a ton of wild ideas out there including investing in sneakers, stock photos, structured settlements, and more. You might be able to find a fun little investment that yields big dividends in an area you never considered!