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The High Cost of Fees
If someone invested $100,000 in a fund, and the fund earned 10% (few do), the total dollars paid by the investor would be $4,000 ($100k x 2% = $2,000 + $10,000 x 20% = $2,000). That means instead of making $10,000 on your $100,000 investment, you walked away with $6,000! Instead of a 10% return, you earned 6%! That’s a 40% drop in your profit!
Also, your money was not available to you until the project or fund sold or closed. That typically is five years or more.
Over the years, investors became wise to the scheme, as did other investment product producers. They introduced lower cost, more liquid alternative investments into the marketplace, and lowered the bar for investing.
In today’s post, we’re going to introduce you to six investments you may not have considered – three for accredited investors, three for everyone else. We think by the end of this post, you’ll feel more comfortable and confident in looking at these investments for your portfolio.
What Are Alternative Investments?
Let’s start with what most consider the traditional investment products – those would be stocks, bonds, and cash. Investors can put money in the U.S. and international markets in both stocks, bonds, and cash. Most investors access these products via mutual funds and exchange-traded funds (ETFs). The most popular form of investing in these markets is via index funds.
When investing in index funds, investors put their money in funds that mirror the market. There are no fund managers picking which stocks to buy, when to buy them, and when to sell. Instead, in index funds, investors get all of the stocks in that index (like the S & P 500) at the same proportion each stock makes up in the indexes.
Rather than trying to beat the market, investors take what the market offers. It’s a very inexpensive and easy way to invest.
Alternative investments, on the other hand, are not mutual funds, ETFs, or index funds. Instead, the funds have a management team and invest in things that are different from the stock and bond markets. They include offerings like private equity, real estate, hedge funds, venture capital, managed futures, and derivative products.
Many of you have heard these names thrown in the financial press. In addition to high fees, many alternative investments have high minimum initial investments.
Crowdfunding - The Game Changer
For the reasons mentioned above, innovation entered the alternative investment arena. As a result, companies began developing investments with lower fees and smaller minimum investments. They made these accessible to non-accredited investors. These innovative investments are a game-changer for the everyday investor.
Crowdfunded real estate investment trusts are the primary vehicle for these investments. These newer funds register with the SEC as exempt funds, usually under the SEC’s Regulation Crowdfunding. Crowdfunding in real estate, like with individual or small business crowdfunding allows smaller investors into an investment space that hasn’t been available to them in the past.
We’ll offer a couple of specific funds to consider shortly.
Other options come in the form of mutual funds (managed futures, commodities, long-short funds, etc.). We will leave the discussion of these for another day. We want to focus on private funds, which are more like the traditional alternative investments initially designed for the wealthy.
Alternative Investments for Everyone
Fundrise and DiversyFund
Alternative Investments for Accredited Investors
YieldStreet is a fixed income alternative investment. The team focuses on investments in litigation finance, real estate, consumer and commercial financing, to name a few. Getting into these types of alternative fixed income areas has typically been limited to hedge funds and other institutional investors. Accredited investors can now access these alternatives with Yieldstreet. They have the experience and expertise you want. Below are some of the details and history.
They have multiple offerings from which investors can choose. The minimum and maximum investment depend on the offering chosen. The minimum investment is usually $10,000. Once again, that is much lower than many alternative investments.
You can read our review of YieldStreet here.
Finding Other Alternative Investments
I hope by now, you see that alternative investments are no longer the exclusive investments for the uber-wealthy. Competition from mutual funds, and, more recently, from the crowdfunded investment arena have brought costs and minimum investments way down. That’s not so good for the Wall Street product producers. But it’s great for consumers.
The six investments we highlight are, by no means, meant to be the cure-all be all for alternative investments though we do think that Vinovest and FarmTogether are two of the more unique offerings available.
Before doing any investing, you should know why you’re investing. You should know what you want your investments to do for you. Once you get those foundational questions answered, you can take the time to investigate the best investments to help you achieve those goals. If you don’t know where to start, a great place would be MoneyMade. If you feel like you need help deciding, consider hiring an independent financial advisor.
Whether you’re a seasoned investor of a DIYer who is looking for alternatives to the traditional stocks and bonds, we think the six investments highlighted here are worthy of consideration. If none of those make sense, head over to MoneyMade and let them help you find what you’re looking for.