With the stock market reaching record highs, many investors have good reason to be worried about a potential correction. With an unstable political climate and an unceasing US-China “Trade War,” the Dow’s continued ascent towards 30,000 appears to be part of a growing bubble. Yet, inflation numbers continue to hover around 1.8% annually. If investors want to keep their money in a savings account, earning around 2%, the real value of their money will be relatively unchanged. However, there are many alternatives to putting money in a bank account, often these alternatives earning more than 2% annually, beating inflation. In this lesson, I will go over a few of these alternative investment ideas. It is important to know that these investments should not be pursued singularly, but in conjunction with a variety of investments, ideally in equities.
Money Market Funds
Money market funds are a type of mutual fund. These funds gravitate towards investing in short-term debt securities, such as Treasury Bills and Government Obligations. The benefit of investing in these types of funds is that they can be entered and exited easily, meaning they are liquid. Thus, there is little risk to these funds, which return about 2% a year. One example of a money market fund is the Vanguard Prime Money Market Fund (VMMXX). You can see that this fund has a low expense ratio, as well as a low minimum investment of $3,000. Over its history, it has consistently returned near that 2% figure. Since there are withdrawal limits to savings accounts, money market funds are a vehicle you may want to consider.
Commodities (Precious Metals)
Precious metals such as gold and silver are an excellent way to make market-beating returns in overbought or unstable conditions. In 1980, gold reached $850 an ounce, due to global tensions and inflation worries. Investors see precious metals as a safe investment relative to the stock market, and begin to pile money into these assets in times of distress. From 2008 to 2011, gold prices more than doubled, as investors piled into precious metals after the financial crisis that pummeled the stock market. Recently, investors have begun to buy more gold, raising the price from under $1200 to over $1500 from 2018 until now. Precious metals can offer precious returns, if you play your cards correctly.
Buying government debt, though not usually lucrative, is a safe investment that has essentially guaranteed returns. Government “T-Bills,” or Treasury Bills, are debt securities that pay an interest rate, and are backed by the Treasury. Currently, the interest rate on the 1-year Treasury is 1.54%. Though this is not very high, these rates fluctuate with the economy’s performance. In a time of a healthy economy, investors pile their money in equities, thus increasing the interest rate on T-Bills to as high as 5 or 6%. Though you may not want to buy T-Bills as investors start to pile more and more into safer securities, they can be a risk-averse alternative in a good economy. For a higher rate with slightly more risk, money market funds will suit you better than T-Bills.
A rising trend in loans has the potential for excellent returns on your money. Peer-to-peer lending, often referred to as P2P lending, is a system in which borrowers can take out loans straight from those that would like to lend. Rather than using a bank to take out loans, many are flocking to sites such as Upstart or Lending Club. On these sites, you as the investor can make returns of anywhere from 5% to 15+%, depending on the risk you are willing to undertake. Note that participating in P2P lending will require extensive research on default rates and the trustworthiness of the service you are using, but any of the large companies that have billions in transactions each year will be relatively safe. These returns have the potential to beat the market, even when it lacks distress. However, it is important to note that during downturns, there will likely be less opportunity to loan out money as there are fewer borrowers.
As the markets continue to rise at a meteoric rate, it may not be safe to invest in stocks or equities. It may be time to consider a new investment idea, so that the real value of your money does not decrease as inflation remains. The alternative investments that I have highlighted in this lesson range in risk and potential return. Regardless of your appetite for various risk-reward combinations, there will be an alternative investment idea that you can pursue. However, as stated earlier, these are not alternatives to stocks. The stock market will likely continue to offer the best return on investment relative to risk. Still, there is a benefit in diversifying your investments to prevent any future downturn.