If you're like me, the 2020 stock market was a roller coaster ride that is unlike anything else. The stock market volatility is likely making you consider if you should only invest in stocks. After all, how many of your friends who invest say, “There is no alternative to stocks?”
Ah yes…the TINA acronym–There Is No Alternative. In this case, the stock market is the only way to earn passive income. Is that really true? Should you consider investing in index funds and individual stocks as we draft our investing in 2021 gameplan?
The stock market can be the best way for most people to invest in 2022. But, as you will see in this article, there are alternatives to stocks that can build wealth and help you diversify, diversify, diversify.
Why Stocks are the Best Way to Invest
Whether you have been in the market for decades or recently created a portfolio thanks to a free investing app like M1 Finance or Robinhood, the US stock market has had amazing long-term returns despite the inevitable market corrections.
Thanks to low-cost index funds and robo-advisors, it's easy for investors to invest in asset class ETFs. With a few dollars, you can hold tiny positions in stocks, bonds, gold and real estate. Historically, these are the assets that average investors who earn a normal income invest in.
ETFs that trade on the stock market are the easiest ways to invest in these assets when you don't have $2,000 to buy a single ounce of gold or $200,000 to buy a rental property.
Thanks to Yahoo! Finance for its charting capabilities, below is the 13-year performance track record for some of the most popular index ETFs. Why 13 years…we get to see the asset performance from pre-Great Recession in 2008.
Here are the 13-year perfomance from October 22, 2007 to October 22, 2020:
- S&P 500 Index (our comparison benchmark): 121.88%
- VOO (Vanguard S&P 500 Index ETF): 121.88%
- QQQ (Invesco Nasdaq 100 Index ETF): 431.93%
- GLD (SPDR Gold Shares): 139.75%
- BND (Vanguard Total Bond Market ETF): 16.39%
- VNQ (Vangaurd Real Estate Index ETF): 7.81%
If you're a “picture person,” here is a chart (courtesy of Yahoo! Finance):
As you can see, tech stocks–the yellow line– are the clear winner of the 21st century so far. For long-term investors, gold edges out the S&P 500 index funds. But gold–the purple line– (and precious metals and commodities in general), are cyclical.
Low Bond Yields Encourage Retirees to Invest in Stocks
Bonds can be better than keeping your cash in a savings account. As interest rates are near-zero since 2008, bonds as a long-term fixed income idea are leaving many retirees and near-retirees flustered.
So, yield hunters are holding more stocks and “Dividend Aristocrats” than their predecessors would during their Golden Years. For instance, instead of going 40% stocks and 60% bonds, you might go 60% stocks and 40% bonds. Smooth sailing during a stock bull market but nerve-wracking during a market recession.
Not investing in stocks means you would have missed out on one of the most effective ways to build wealth in the last century. You can even argue the best time-proven way to build wealth with small amounts of money during the history of the world.
Be Careful Only Investing in Stocks
Most workers only invest in stocks–and bond funds that trade on the stock market through a 401k. Since World War II, this has been an effective strategy as the United States was pretty much the only developed country with an intact domestic infrastructure. Europe and Asia were decimated and had to rebuild from scratch.
Having the global fiat currency and a relatively laissez faire economy gave US economic growth tailwinds as well.
But global economics are changing and other nations are challenging American hegemony. Plus, the corporate debt cycle and technology trends impact which stocks are good investments and which to avoid.
Index Funds Don't Guarantee Profit
Index funds that buy a slice of each company in the S&P 500, Nasdaq 100, etc. have made investing (and earning a profit) easy this century.
But, we're seeing lots of rapid shifts in how we live life. The events of 2020, have shown how many people can work from home instead of commuting to an office. And, FedEx and UPS can be crazy-busy every week of the year instead of only from Black Friday to December 25th.
We're also seeing a push for alternative energy. As a result, the darling investments of the past 50 years are not likely to be the best investments for the next 50 years. Until we know who tomorrow's best investments are going to be, companies will go bankrupt or trail the overall market.
Index funds may not be “foolproof” if there are more laggards than progressors. I'm speculating, but investing with stock newsletters can be more valuable than before. Newsletters have losing investments too, but a credible letter can help you find legit stock investing ideas and avoid bad stocks.
I also think that taking a basic course in technical analysis is helpful too. You don't have to day trade or swing trade, but in this market, fundamentals don't matter as much as they used to. Learn about the moving average to start.
You can also use your online broker's charting tool for basic technical research. A more robust option is TradingView.
Are There Alternatives to Stocks?
There are several ways to earn passive income without investing in stocks. Sure, stocks are the easiest way as they require the least amount of money.
Buying stocks can also be easy to understand if you use their products. For instance, you might buy Apple stock if you have an iPhone or Amazon stock if you love Amazon Prime.
I don't recommend investing on individual sentiment without performing your due diligence. But understanding how an investment makes money–and can lose money–is essential.
I believe many investors are realizing the potential value of owning physical assets. Stocks and bonds are great, but they are paper assets.
With physical assets, you at least have something that you can touch even if it's “worthless.”
The best physical asset can be the one that you (a) afford and (b) understand. That might be baseball cards, antiques or muscle cars. But you might also try these alternative investing ideas.
Of course, you should still consider keeping some of your cash in the stock market to diversify your portfolio. Plus, stocks have instant liquidity. These assets can take months to sell and their market value can ebb and flow.
Tip: Use Blooom to rebalance your 401k or IRA if you need help setting an asset allocation.
Gold and Silver
Precious metals have been a currency and measurement of wealth for thousands of years. In fact, the US dollar was linked to the “gold standard” until 1971.
Four popular metals to consider holding are:
You can buy these items as coins or bars to own the physical asset. There are also paper ETFs but you can't trade your shares for physical bullion in most instances. Research the “silver squeeze 2021” to see why precious metal ETFs aren't a foolproof investment.
Gold is the universal favorite for several reasons–it doesn't tarnish. You can buy gold royalty stocks and gold trust ETFs through your stockbroker. However, you won't be able to take possession of the gold.
For that, you need to buy physical gold coins and bullion. I personally like Vaulted as you can buy physical gold in partial amounts. If you only have $20 to invest each month, you get a tiny portion and eventually get an ounce. Vaulted can FedEx your bullion to store in your personal safe.
If you prefer physical delivery from the get-go, then JM Bullion is one of the best platforms.
Owning some silver is a good idea too. Silver is cheaper per ounce than gold and its price can differ. Check the gold-to-silver ratio to decide when to buy gold or silver.
Diamonds and Precious Gems
Investing in diamonds and other rare gemstones can be a timeless investment strategy as they have been a store of wealth since ancient times. They can also be easy to store as they are small.
You may already have a small position if you have a diamond wedding ring or engagement ring. Be sure to have your gemstones professionally appraised with GIA or IGI certification to know their true market value.
I don't consider your primary residence to be an investment. If you sell it, can you truly downsize and pocket the cash difference?
Rental property is a long-term investment idea. You will need to vet tenants, set aside money for repairs and maintenance, so this isn't a true passive income idea.
But if you can buy a property in cash or for a small loan, the monthly income can be good. Plus, you don't pay self-employment taxes on rental income!
Flipping homes is better if you don't have the time or patience for being a landlord. This income idea can be cyclical as you're at the mercy of the local real estate market. Seller's market=good. However, a buyer's market can be an unpleasant time to try and make a profit.
Real Estate REITs
If you want to invest in handpicked real estate deals with small amounts of money, Motley Fool's MillionAcres Real Estate Winners ($149 for the first year) can be a good option.
You get one new monthly real estate recommendation in publicly traded securities.
Consider this option if you prefer real estate stocks and highly liquid investments instead of a property that requires maintenance and screening tenants.
Small Business Bonds
Directly investing in small business bonds is different than holding bond index funds that hold corporate and government bonds.
Small business bonds don't let you own an equity stake in the company (that's what equity crowdfunding is for) but you can earn at least 5% interest on your investment.
There are several bond platforms you can use to invest.
The SMBX (Small Business Bonds Marketplace) awards up to 9% interest. You can handpick which offerings you invest in which lets you support a particular mission. Accredited investors and non-accredited investors can invest in $10 increments.
I don't consider cryptocurrency to be the best alternative to stocks as its highly volatile. For example, who expects a 400%+ return in six months.
We also don't know what government regulations are in the pipeline.
With that said, if you have money to speculate with, having a little Bitcoin or Ethereum and maybe some of the other alt-coins (i.e., Cardano, Polka Dot) can be worth it.
We don't know what the future holds and it's been a crazy year. I don't know if we'll see Bitcoin at $100,000 or $2,000.
More places are letting you pay for purchases with crypto and this can increase the price. PayPal is one of the most recent apps to announce plans of offering crypto. But (there's always a but, right?), you can't remove Bitcoin from most platforms including PayPal and Robinhood.
Tip: I love earning high yields but avoid high-yield staking platforms. For example, research BlockFi Interest Accounts and Celsius to understand the risks of not being able to access your money.
Your Own Business
A crazy idea–crazier than crypto–is launching your own business. People across the country are facing salary cuts, reduced schedules and layoffs.
Trying to start a side hustle can diversify your income streams and you may eventually make a full-time salary from your endeavor. If not, a little extra cash each month can bring peace of mind.
Bonus: Consider these small business tools to help launch your brand and make freelancing easier.
There is no alternative to stocks if you want to invest effortlessly and with small amounts of money. However, if you want to be a contrarian, having some physical assets can diversify your income.
You can be more likely to at least earn something instead of seeing your portfolio value plummet as more investors rely on stock growth and dividends as bonds remain lackluster.
What do you think? Does it pay to invest outside the stock market? If so, what's your favorite idea?
Josh founded Money Buffalo in 2015 to help people get out of debt and make smart financial decisions. He is currently a full-time personal finance writer with work featured in Forbes Advisor, Fox Business, and Credible.