First of all, I love investing in the stock market. Sure, it can be volatile, but over the long term, the return can be very rewarding. I started investing in the stock market in 1996 as soon as I started working. At first, I invested in company stock and random mutual funds in my 401k. Then I branched out and invested in individual stocks and more random mutual funds in my taxable accounts. These were my learning years and I won some and lost some. Honestly, I probably lost more often because I started around the dot com bubble era and I didn’t have a good investment strategy.
Eventually, I settled on a simpler strategy. Now, all of our retirement accounts are invested in low cost index funds. These are spread across US and international stocks, REIT, and bonds. Most of our taxable investments are invested in blue chip dividend stocks. We also have 2 rental properties which should pay off in the long run. Lastly, I have a small amount in P2P lending because I wanted to experiment. It also provides some diversification from stocks.
Talking about diversification, there are many more ways to invest now than in 1996. The investing landscape has changed quite a bit and investors have a lot more choices in the 21st century. Technology has made many exclusive investments much more accessible to the average investor. Personally, I think most investors should put the bulk of their money in low cost index funds. That’s the easiest way to invest and it works well for your retirement accounts. However, if you have extra money to invest, then check out these alternatives to get a little more diversification in your portfolio.
In the past, hedge funds were reserved for the very wealthy who could invest over a million dollars into one fund. Now, through new startups like Sliced Investing, it’s possible to start investing in a hedge fund with as little as $20,000. Investors can join Slice Investing start browsing their hedge fund offering with just a few clicks.
The advantage that hedge funds have over index funds is their flexibility to employ advance trading strategies such as short selling and event driven trading. I have no idea how to use derivatives and I don’t have time to follow the stock market that closely. I’m sure most individual investors are in the same position. Generally, hedge funds aim to protect the investors during the down years while also capturing a majority of the upside in the bull years. The stock market has performed very well over the past 5 years and we will see a big downturn at some point. Hedge funds can alleviate the pain during the down years. Their aim is to provide diversification from the stocks and bonds. Of course, the result will be dependent on the fund manager and his/her strategy.
Another investment that technology has made available to investors is real estate investing. In 1996, if you wanted to invest in real estate, you had to put some money down to buy your own property. Well, you could invest in REIT, but we’ll get back to that in a minute. Now, you can invest in individual commercial properties through crowdfunding companies. You can pool your money with like minded investors and invest in various projects like a B&B rehab, a mobile park, or a strip mall. Of course, you would have to do some homework to see if the risk is worth it.
How is this different from REIT? When you invest in REIT, you are investing in a company and you’ll get a dividend payout. REITs are publicly traded and will be affected by market fluctuation. On the other hand, if you invest in a property through a crowdfunding site, you’re investing in that property. One caveat is that your funds might be tied up for some time, depending on the project.
If you’ve been following Retire By 40, then you’d know I love the TV show Shark Tank. It’s fun to see entrepreneurs pitch their products to venture capitalists and see the sharks fight over a great product. Now you can be one of the sharks, too! Through crowd funding, you can invest in startups and shoot for the moon. Of course, this is a risky investment. I heard somewhere that less than 1 out of 5 investments pans out for the venture capitalists. It can also take years for a startup to make it big. For me, I think I’ve had enough of start ups. I invested in a friends’ company and it never panned out. The stock I paid 10 cents for are worth about 0.01 cents now.
*You have to qualify as an Accredited Investor to invest in any of these investments. This means your net worth must be over $1 million (excluding the value of your primary residence) or your income exceeded $200,000 in the last two years.
Technology has come a long way
Technology is quite amazing. Crowdfunding is making all these previously exclusive investments available to a lot more investors. Previously, you’d have to write a million dollar check to invest in most hedge funds. Now, you can try hedge funds out with $20,000. These investments could provide some diversification from your normal index funds. It’s great to be able to invest a relatively affordable amount and see if a particular investment is a good fit for your investment style. If a hedge fund works out, then you can always reallocate and move more money there. For now, I will keep the bulk of our investment in the boring old index funds. However, I wouldn’t mind trying some of these crowdfunded investment out and see if it’s the right fit for us.
What do you think about these crowdfunding investments? Would you diversify your investment with these new options?
Disclosure: This blog post was written for Sliced Investing pursuant to a paid content arrangement I have with the company’s representatives as part of an effort to raise awareness about alternative investment options.
Image credit: flickr by Rocío Lara
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.