Investing

10 Alternative Investments Outside of Stocks and Bonds

7. General Stuff: Garage Sales and Estate Sales

It might not seem realistic that people could just drive to garage sales and estate sales to make an investment. Reality is different. Many sellers just want to get rid of family “stuff and junk,” but quite often there are major scores because people do not know what they are selling. This is where people can buy furniture, collectibles, clothes, art and just about anything else in a house at prices that can sometimes be at pennies on the dollar. If you ask antique store owners how they find so many of their items that have been hidden away from the public, one of the sources of so much is via estate sales. You too can do this, and you can sell from your home via eBay, Amazon or Craig’s List. You can often sell those items to stores or dealers. The general term for this is now being a “picker” (just like the TV show “American Pickers”) and it can be quite profitable if you know what you are doing or get incredibly lucky.

There are many risks in buying from estate sales or garage sales. Someone down the road could claim that the item was stolen. If you are not paying close attention to what you buy and sell, you could be buying and selling something different from what you thought it was. There are also many fakes and replica items that get bought and sold, often without the buyer or seller ever knowing it. And back to beauty is in the eye of the beholder: you might think something is worth $1,000 when most people wouldn’t want it if you paid them to take it. There is also a risk that your buyer tries to back out or wants to return the item or dispute the transaction. No free lunch here.

8. Private Loans

Some shrewd people take the route of making private loans. These can be made to individuals or they can be made to a business. This can be quite lucrative, particularly if the loan is made to people or businesses that have ample assets or cash flow but with limited credit or bad credit history. You might also be make 8%, 10% or more, and in some cases you might even ask that the loan has a convertible feature or comes with an upside under certain circumstances.

There are risks in making private loans. First and foremost, you might have a hard time collecting interest and getting paid back your principal. Being a private lender also can damage relationships with friends or family. Collecting money from your kids or best friend is not fun, and it can create friction or even fights. Another risk is that if your business or friend runs into financial or tax problems ahead, the IRS or other creditors may demand that money as they had a higher standing in line. Another risk that lenders have to consider is when usury law comes into play. It could come with big fines (or worse).

9. Private Equity and Hedge Funds

Many wealthy Americans invest in hedge funds and private equity funds. These are expected to generate returns via income and gains through time. Many funds of this sort have very specific targets or asset classes, while others just look for opportunities regardless of where they are. Or the fund groups may just turn around and invest in stocks and bonds. Generally, except for long-only funds, hedge fund investors are looking for absolute returns, even if it is by profiting from downside. Private equity investors are usually looking for above-market returns through time or they are looking for income and/or long-term gains that are not correlated to the markets.

Even hedge funds and private equity funds managed by very sophisticated and smart investors come with risks. If investors want their money back, it can be locked up for months or years. If the money is paid back, future investors may demand claw backs so that you have to share your proceeds with a larger pool, like in the case of the Madoff scandal. Speaking of Madoff, it seems amazing or impossible but there are still many scams and financial shenanigans that can take place, between management fees, operating fees and net performance fees. Another risk in funds like these is that many investors do not even know how their money is being invested for quite some time.

10. Cash

Most investors forget that cash is an asset class in and of itself. It can be cash in the bank, it can be in a lock box or it can be cash in a money-market account at a brokerage firm. The phrase “cash is king” comes to mind, because you can spend it for what you need to buy or you can save it for a rainy day. Most rich people and those with wealth tend to have cash in an account or on hand — who wants to be called “cash poor” despite being wealthy? There are other alternatives now to just cash. You can hold foreign currencies, or you can even go the crypto-cash route like Bitcoin.

Cash is not immune from risk, and modern times have proven that in a new method. Cash’s value is what the value says it is on the face, but consumer prices fluctuate through time and inflation bites into cash’s relative value as well. The other side of the coin is that negative interest rates in much of the world mean that cash held in a bank account actually loses a small amount of money. Cash can be stolen, and cash is hard to claim as a loss because it is so hard to prove. Physical cash can also get lost, or it can be destroyed or burned. Again, good luck getting that back.