Whether you can’t get over your fear of investing in stocks or you just want to diversify your portfolio, read on to learn about alternative investment options to put your money to work for you without buying stocks. These choices, though, run the gamut from very safe to highly volatile, so do your homework before you invest.
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1. Real Estate Investment Trusts
Investors who are looking for ways to invest in real estate properties but either lack the cash or the time for detailed research necessary to buying them outright should consider a real estate investment trust, or REIT. REITs invest in a range of real estate, including housing, commercial buildings, hotels and warehouses, and then distribute the rental proceeds to the owners. This lets you include real estate in your portfolio even if you don’t have a couple of million dollars sitting around — or endless hours to research your area — to buy some property yourself.
2. Peer-to-Peer Lending
You can invest in loans to other people through peer-to-peer lending services like Prosper and Lending Club. You can contribute small amounts — as little as $25 — to fund a loan a customer is requesting and then get repaid with interest as the loan is paid back. The risk is that you lose your investment if the borrower defaults, but by investing small amounts in a range of notes, you can reduce your exposure to any one person’s financial situation. If you have just one note and the borrower defaults, you’ve lost everything. But if you have 100 small notes, several borrowers could default and you might still come out ahead.
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3. Savings Bonds
Check out savings bonds if you’re looking for investments that pay stable interest rates. Savings bonds are offered by the federal government and pay interest over a specified period of time. They’re very low risk because they’re paid by the government, so the only way you could lose your money is if the government defaulted on its debts. You can buy either Series EE bonds, which pay a fixed interest rate, or Series I bonds, which have a portion of the interest rate based on the inflation rate.
You can invest in gold in a variety of ways, including gold bullion, gold coins, gold mining companies, gold futures contracts and mutual funds that invest in gold. Anyone considering buying bullion or coins directly should make sure to have a safe place to store the investment like a safe deposit box at a bank.
The Federal Trade Commission advises that gold prices can go up and down and that you should investigate any company that you use to invest in gold before you buy. Though it can sound like an added bonus if the company you use will store the gold securely for you, it’s especially important to make sure you’re dealing with a reputable company if you aren’t taking physical custody of the gold you are buying.
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5. Certificates of Deposit
Certificates of deposit are bank accounts that offer a fixed rate of interest for a specific period of time and are protected by the Federal Deposit Insurance Corporation. But in the event you take out your money before the term ends, you will usually pay an early withdrawal penalty. The interest rates typically won’t match long-term returns in the stock market, but they’re guaranteed by the full faith and credit of the U.S. government not to lose value.
6. Corporate Bonds
When companies need to borrow money, they usually issue bonds — bonds that anyone can purchase either from the company or on the secondary market. A bond pays interest over a set period of time, and then it pays the face value of the bond when it matures. The interest rates vary depending on the risk of the borrower defaulting — the higher the risk, the higher the interest rates.
Unlike a stock, owning a company’s bond doesn’t mean you have any ownership of the company, so you won’t make extra money if the company does really well. But in the event the company has a down year, there’s no change in the amount of interest you’re owed, so your returns are more predictable than stocks. That said, while corporate bonds are often very safe, there are no guarantees — with default or bankruptcy, you could lose most or all of your investment.
7. Commodities Futures
You can buy and sell contracts for future commodities including foodstuffs like corn or grain and metals like copper. As the supply and demand for that commodity changes, so does the value of the contract, so you could make a lot of money — or lose a lot. Investing in commodities can serve as a hedge against inflation, but this is a complicated market with a variety of highly-competitive players, so enter the fray with extreme caution if at all.
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8. Vacation Rentals
Buying a vacation home to use as a rental property when you’re not visiting can be a great way to feed your soul and your portfolio at the same time. You can use it when you want to take a trip, and then rent it out to cover your costs while the real estate (hopefully) appreciates. Though vacation rental websites can make management easier, the homes aren’t very liquid. So in the event, you need your money out in a pinch, you might have to wait to find a buyer.
Cryptocurrencies are non-centralized, digital currencies gaining popularity around the world. Bitcoin is the most well-known cryptocurrency, but it’s certainly not the only option. Cryptos are very volatile and the price swings are not for the faint of heart, so this is an option that’s only for the real gamblers out there.
10. Municipal Bonds
City and state governments also issue bonds to raise money for projects such as building new schools or highways. Though these bonds might pay lower interest rates than corporate bonds, the interest is exempt from federal income taxes and might also be exempt from state and local taxes, making your after-tax return comparable or sometimes higher than on some bonds with better interest rates.
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11. Private Equity Funds
Private equity funds pool investors’ money under the control of a manager who uses the money to invest in privately held companies in a management capacity to help them grow. Private equity funds might generate higher rates of return, but they can also have high management fees and can lock up your money for several years or more. In addition, direct investment in private equity funds is generally limited to accredited investors, so you might not qualify to invest if your net worth or income isn’t high enough.
12. Venture Capital
Venture capital investing involves loaning money to business start-ups to help them get off the ground — really the same as private equity just staying focused on early-stage companies. Because these investments are risky, they’re typically only available to accredited investors, but some relatively new options like equity crowdfunding have created some limited opportunities outside that set.
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Annuities are contracts where you agree to pay a certain amount of money up front in exchange for a series of payments over a certain period of time, or for the rest of your lifetime, from the insurance company. Annuities can be fixed, variable or indexed, with the difference being how your future payments are calculated. Annuities often offer the advantage of delaying taxes on the earnings until they are paid out to you. But annuities might have high fees that can reduce your earnings. They’re also commonly associated with high commissions for brokers, meaning an investment expert steering you into an annuity might not have your best interests in mind, so exercise caution and do your own research before buying one.
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Joel Anderson contributed to the reporting for this article.