What Are The Best Alternative Investments?
The Appeal of Alternative Investments
As a millennial, I personally feel the pain of having just emerged from another world-ending, life-altering era in my life. We had the threat of Y2K, the dot-com bubble, September 11, the 2008 financial crisis and now COVID. All of these instances brought with them a certain level of economic devastation, with our parents losing jobs, savings accounts getting wiped out and 401(k)'s disappearing in the blink of an eye.
This constant economic turmoil has created an understandable level of doubt in the minds of many millennial's when it comes to investing in the stock market. While the point of this site is to try to convince you otherwise, investing in the stock market can be a scary proposition. But what are you supposed to do in order to grow your money? We've already covered that a savings account will see your money wither away thanks to inflation, so where else do you put it?
That's why I wanted to chat today about alternative investments. Alternative investments are those that don't involve stocks, bonds or traditional real estate investing. For the purposes of today's article, I'm also not going to include cryptocurrency investing or NFT's, as that's becoming more mainstream these days as anyone with a phone and a Robinhood account can throw "Investor. Dream Maker" in their Twitter bio.
This is not investment advice. Please seek a professional for your individual situation.
Let's cover my top five favorite alternative investments, starting with number 5:
5. Investing In Peer-to-Peer Lending
Peer-to-peer (P2P) lending is like lending money to a friend, if that friend was a complete stranger hundreds of miles away. P2P lending essentially makes you into your own little bank, doling out personal loans to other people in need, in exchange for a fixed interest rate.
Let's say someone in Kansas has $15,000 in credit card debt. They want to consolidate that loan to pay a lower interest rate and pay it off faster, so they go to a site like Prosper or Lending Club in order to get their loan funded. They enter all of their information that they would at a normal bank (name, credit profile, income, etc), and then the crowdfunding campaign is on!
As the lender, you can review the profile and decide if you want to contribute or not. From there, you select how much you want to contribute, and if the loan is funded, then you're in.
Loan terms are typically longer for these types of investments (three, five or seven years is standard), and you'll see interest rates commensurate with typical debt origination profiles (prime, subprime, etc). The lower the credit profile, the riskier the loan, but the higher the interest rate.
This is one I've actually participated in for the past few years via Prosper, funding micro-loans in $25 increments every few months. I've actually seen a pretty incredible return, averaging 11.3% per year, which is spectacular. I also feel better about myself knowing that my investment is helping those that actually need it, rather than buying Peter Thiel another yacht.
4. Jumping Into Crowdfunded Real Estate
Let's say that you really want to get into real estate investing, but your job at the local restaurant doesn't let you save up enough to purchase an investment property. It's a problem that pretty much everyone can relate to, so rising out of the recent FinTech resolution comes a solution: Crowdfunded Real Estate.
Crowdfunded real estate works similarly to the P2P example above: you pool your money with other investors into a platform like YieldStreet or Fundrise, and that company purchases real estate that then distributes cash back to you. Sounds great, right? There are a few catches you should be aware of.
The first is that these companies don't typically offer retirement accounts, which means they are not tax advantaged. That's important, because real estate distributions are taxed differently than standard dividends, so this could increase your tax bill at the end of the year.
The second catch is that these investments are highly illiquid. If you own $10,000 in the stock market and need that money right now, you can generally sell and get liquid quickly. With crowdfunded real estate, you're shit out of luck. These companies generally offer share sale windows in their properties, but they're quarterly, which means you'll have to wait to pull money out. Make sure you have your emergency fund well stocked before you jump into this one.
3. Whiskey By The Barrel
Turns out, it's not just expensive to buy and drink. It's also expensive to buy and hold! Whiskey is a burgeoning market that wealthy investors are flooding to thanks to a few reasons:
Whiskey is incredibly labor intensive, and a waiting game. Whiskey takes forever to make, which results in much lower available quantities, creating shorter supply.
The shorter supply has led to higher demand, which has led to pumped up returns. Whisky Investor Club notes that whiskey has a historical return of between 8%-12% per year, but has returned 586% over the last decade.
Relatively low barrier to entry. Buy-in's for whiskey investors tend to be around $10,000, which is a lot of money, but it's a hell of a lot cheaper than buying a Rockwell painting.
Speaking of a Rockwell painting, you have to have somewhere to actually keep that painting so it doesn't get damaged and it continues to appreciate. With whiskey? It's stored for you, so it's hands off.
One more key to whiskey investing that's made it incredibly attractive to alternative investors recently: it's tax free. Whiskey is classified as a "wasting asset." As such, investing in whiskey, and the money you'd make after a sale, is not subject to capital gains tax.
2. Snapping Up Luxury Watches
The luxury watch market has had a weird renaissance as of late. The industry used to be a minefield for money laundering and tax evasion in the mid-2000's, mostly from incredibly wealthy Chinese citizens who would purchase watches in the U.S and then use them to move tens of thousands of dollars around on their wrists prior to sending them to the resale market. After international rules about import taxes and customs limits changed, that market largely dried up.
However, watches are back in a big way as alternative investments. According to consulting firm McKinsey, the pre-owned watch market was worth $18 billion in 2018, and is projected to grow to nearly $30 billion by 2025. Leading the way is mass-market luxury watchmaker Rolex, followed by the higher-end watches only accessible to the uber-wealthy. Brands like Audemars Piguet, Patek Philippe and Richard Mille are growing in popularity, which is causing scarcity among the most sought-after models. The AP Royal Oak has been seen on some second-hand markets selling up to 50x over MSRP for limited edition models.
This market is largely unapproachable for people like you and me that don't have $40,000 laying around to buy a watch and then store it for a few years until its value grows. Naturally, that means we'd turn to the lower price point of the Rolex, but here's the issue: it's too late.
This issue was brought to my attention on an episode of The Iced Coffee Hour last year, where host Graham Stephan interviewed Federico Talks Watches, the founder of "Delray Watch Company" that specializes in pre-owned watch sales. He mentioned on the episode that he cannot find Rolex Submariners because they are so rare thanks to the overwhelming investment market. If you already own one of these, hang onto it with your life.
1. Investing In Birkin Bags
This is another one I discovered a few years ago, but no one EVER talks about in investing circles. These bags are well known to celebrities, high-profile rappers and those plugged into luxury fashion, but they're next level.
Created in the 1980's by luxury brand Hermes, it was designed specifically for actress Jane Birkin, who complained that she couldn't find a bag that suited her lifestyle as a young mother. She happened to mention this while sitting next to Hermes executive chairman Jean-Louis Dumas, who got to work on a design for a new bag for Birkin.
Since then, these bags have been on the arm of pretty much every major female celebrity. They've been featured in movies and TV, as well as general pop-culture around the world. They've become a status symbol, with the price to match.
Birkin bags generally run about $4,000-$10,000 new at retail, but that's the thing: you can't buy them at retail unless you are somebody or you know somebody. That means you'll have to turn to the resale market, where these bags run anywhere from $12,000-$18,000 for the more common styles. However, according to Charles Gorra, founder and CEO of Rebag, an online resale marketplace, these prices can be much, much higher. Rebag's record sale for a Birkin bag is a $70,000 bag made of white crocodile, but Gorra notes that he's seen a diamond-encrusted Birkin bag go for north of $2 million. A quick Google search shows the pricing variation on these bags:
So why are these elusive bags number one on my list of the top alternative investments? Because, since they were created in 1984, the price of these bags have never gone down. In fact, these bags appreciate at an average annual return of 14.5%, which is nearly double the S&P 500's annual 8% return. Buying a Birkin bag has been a better investment than stocks, bonds, gold and even real estate since 1984. In the 2010's, Birkin bags have only been outpaced by cryptocurrency in terms of total returns.
The Bottom Line
As you can see, there is no shortage of places to park your money if you aren't into the game of investing in stocks, bonds, commodities or cryptocurrencies. Some of these are investments are genuinely incredible performers, but there are a few things you HAVE to keep in mind if you're going to dip your toes into this world:
Many of these require you to be an accredited investor. This is a very small percentage of the population, and if you are not one, this opportunity will not be available to you;
These investments tend to be highly illiquid. Make sure you are investing with money you won't need in the next 3-5 years;
Some of these investments are not at all tax-advantaged. Any significant returns on these assets could see you eating a huge tax bill;
As with all investments, there is an inherent level of risk and speculation that come with these. If you invest in whiskey, the distillery could explode. Hermes could announce they're lowering the price of Birkin bags to $10 tomorrow. Anything could happen, so don't take past performance as an indication of future results.
With all that being said, the world of alternative investments in a fun and exciting place. With more options than ever thanks to the rise of financial technology, I only expect this to grow in the years to come.
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