Avoid the Stock Market- Look at These 5 Alternatives Instead
The stock market is a scary place, especially for those that don’t have training and experience. Even for those that do know what they’re doing, it can prove daunting and stressful… there’s a reason why traders burn out after a few years.
But are there any alternatives which can offer decent returns and help your investments bear fruit?
Prepare to be enlightened.
Hello Mr Bond (s)
Bonds are one of the more traditionally favoured investment types, and are often turned to in times of economic turmoil because they’re perceived as low risk. A bond is simply a loan that is provided to a government or blue-chip company. Bonds require the borrower to pay fixed interest rates for a set period of time. Whilst they may give you a much lower return than equities or peer to peer lending, bonds due to the credit worthiness of the borrower and are thought as being able more stable. It is important to remember, however, that the value of a bond will broadly correlate with the interest rates set by the bank of England.
Generally speaking, if interest rates go up, the value of bonds will go down. It‘s an inverse relationship.
Let’s run through a quick example. If a bond promises to pay 6% interest annually and the market rate is 6%, then the bond’s price should be the same as the bond’s maturity value. However, if the market rate increases to 7% and an existing bond is promising only to pay 6%, the 6% bond will not be worth its face value or maturity value. For it to be sold, the price will have to be less than the maturity amount. Alternatively, if the market rates drop to 5%, an existing bond that is promising to pay 6% will prove to be a very attractive proposition. Because of this, the bond will sell for more than its maturity value. To summarise: present value moves in the opposite direction to market interest rates:
- Bond prices will go up when interest rates go down
- Bond prices will go down when interest rates go up
Commodity Based Assets
More of a ‘specialist’ sort of asset, commodity-based assets are particular to a certain industry or sector. This diverse asset class includes items such as:
- Parking spaces
- Fine art
- Vintage cars
Although on a superficial level these might seem like strange things to invest in, many people make a very good living from buying and selling such assets.
It can make sense to invest some of your capital in esoteric assets like stamps because their value is not linked to the stock market so if something was to go wrong with your stocks and shares investment, your commodities won’t necessarily experience any knock-on effects. By investing in unrelated assets, you are (whether you know it or not) implementing what’s known as effective diversification.
However, investing in stamps, wine, gold or any commodity-based asset does not produce any sort of income. To make any money you are dependent on which way the market goes. They are highly speculative investments. Buying and selling at the right time is key… and you must be an expert in your field. As the saying goes, if it was that easy, everyone would be doing it.
Become Your Own Boss
Whilst you can earn a perfectly good wage from a typical 9-5 job, the fierce competition at the top will always keep those earning megabucks to a bare minimum. On the other hand, when you own a business, the potential to earn larger sums of money becomes much more likely. What could be more rewarding than investing in your own business and being your own boss? You can earn a very decent passive income unconnected to the hours you put in and build a valuable asset that can be sold on at a later point.
That being said, there’s not always a pot of gold at the end of the rainbow.
You will generally need substantial capital to start up and grow a business you may have to commit to paying high interest rates or giving shares to investors… and the sad fact is most businesses fail. According to the Small Business Association, 30% of new businesses fail during the first two years, 50% during the first five years and 66% during the first 10 years. It’s not for the faint hearted.
Equity Based Investments
Rather than invest in a fund or publicly traded shares, you may love the idea of choosing exciting new businesses to invest in. Investing early stage in the next Apple Google Amazon can turn you into a millionaire. But realistically, your chances of picking winners are slim, and you should only expect a few companies you invest in to return a good multiple on your investment.
Even Venture Capitalists with all their experience and analysis teams only work on a ratio of 1 in 10 of the companies they invest in really taking off. Investing in start–ups has other attendant risks as well, such as dilution. Let‘s say for example, that you have a portion of shares invested in a small start-up business. A few months down the line, the business starts to receive a lot of interest from investors looking to capitalise on their success. Large investors come in and negotiate preferential terms. This extra investment will not only dilute your shareholding but means that the large investors will get to control the direction of the company, may get preferential terms for being paid out what the company sells for and for how much. You as a small investor will have no control and will be at the mercy of other people whose interests may not be aligned to yours.
A Brighter Future With Peer To Peer Lending
Peer to peer (p2p) lending is easy to understand. It is simply combining funds with lots of other people to lend to a specific borrower via a web platform. Banks have been using your money to make loans for centuries and keeping the lion’s share of the profit (whilst paying you a low rate of interest). But now, thanks to p2p platforms, you can cut out the banks, decide what level of risk you are comfortable with, lend direct to appropriate borrowers and potentially make very attractive returns.
P2P lending has become, over the last 12 years, a popular alternative to stock marketing investing. Whilst there are, of course, risks to be considered, (in particular the borrower’s ability and willingness to repay) the returns can be attractive with significantly less risk and volatility involved in stock picking. This is especially true if the loans are secured against assets such as the property by way of a legal charge.
The world of peer to peer lending offers a variety of investments that appeal to a wide range of investors everything from ethical lending for environmental projects, lending to farmers or small businesses in developing countries to lending against assets such as real estate, yachts or art works.