I'm the first to admit that stock market volatility isn't fun. The year (2020) was a prime example of what a stock market roller coaster looks like.
All-time highs to multi-year lows and back to all-time highs in a matter of a few short months. If you are looking for ways to invest outside the stock market and earn steady passive income, this article is for you.
My wife and I have been investing in stock market alternatives for the last few years. We like the diversity and the possibility of earning passive income in any credit cycle.
While our stock portfolio has been down at times, we make residual income from some of the alternative investments I mention below.
If you don't want to solely rely on side hustles to make extra money, you might pursue a few of these ideas.
Note #1: I originally wrote this article in March 2018 but it receives routine updates. I do my best to keep the information current in these crazy times.
Note #2: I personally invest with some of the platforms I recommend below. If you open an account clicking the links in this post, I might receive a referral commission.
11 Ways to Avoid Stock Market Volatility
With these three suggestions, you don't have to be an accredited investor where you make at least $200,000 a year and have a high net worth. Since we only financially thrive on $35,000 a year, you can tell that we're far away from that threshold and are just an Average Joe investor that doesn't want to be 100% exposed to stock market volatility.
1. No-Penalty CDs
Cash can be a great place to temporarily park your investments into a bank CD can be low risk yet offer a higher yield than a regular savings account. In fact, banks are currently reporting an unprecedented number of cash deposits in 2020. I've been building my cash reserves over the last few years too–for full disclosure.
The only downside with traditional CDs is that you pay an early withdrawal penalty if you cash out your CD before the maturity date.
No-penalty CDs can offer yields higher than the average bank account without withdrawal penalties. And, you can make penalty-free early withdrawals. There might be a minimum initial investment of at least $500. But, parking your cash here can be better than “losing” $500 due to stock market volatility.
If your bank doesn't offer no-penalty CDs, consider getting one from CIT Bank. I joined CIT several years ago because of their competitive yields.
2. Invest in Crowdfund Real Estate
My wife and I have a rental property in our local market but you may not have the cash or time to buy your own property. We want to add more investment properties–whether that's flipping fixer-uppers or buying a second rental property. However, buying local real estate can require a small fortune.
Another way to directly invest in real estate is with real estate crowdfunding platform such as Fundrise. There are several other crowdfund platforms, but Fundrise is who I personally invest with so I recommend them first.
I have a small amount of cash invested in Fundrise to earn a stock market-like annual return without the hassle of managing the property. The average annualized returns (before taxes but after fees) for the entire Fundrise portfolio in 2018 was 9.11% and 9.47%. The current annual dividend yield is 4.65% as of June 2020.
Unlike buying a house to fix and flip that requires a significantly larger sum of cash–like $60,000 to $100,000 significant in a single property–Fundrise will invest your money into several different projects to diversify your real estate investments in a real estate investment trust (eREIT).
You can buy REITs and real estate ETFs from your stock brokerage where you can invest in real estate investment companies, you have direct ownership with Fundrise.
While you can earn competitive annual returns, you should only invest cash you don't need for at least five years. You see, you pay a minimum 1% early withdrawal penalty if you liquadate your shares within five years of the investment date. Also, Fundrise (and other crowdfund real estate platforms) can pause temporarily pause redemptions if market conditions deteriorate to prevent a “fire sale.”
My Experience with Fundrise
I joined Fundrise in January 2018, so I've only been invested for one full quarter with my initial investment of $500. But, we're on track to earn a 6% return for calendar year 2020 right now due to one project failure. My annualized return is approximately 8% once you factor in the 2020 performance year-to-date (as of June 27, 2020).
Considering this money was sitting in our bank account that only earns 1.00% interest, I'll take it. And, it has a higher annual dividend than the Vanguard Real Estate ETF (VNQ) that I'm also invested in which yields approximately 5%.
I joined with the minimum initial investment of $500 and your balance is put in a “Starter Portfolio” that divides your investment into an East Coast, Midwest, and West Coast real estate. So if the real estate market tanks in one part of the country, theoretically the other two funds will carry the water and still help you earn a positive return.
Fundrise invests in a portion of residential, commercial, and industrial properties so you can invest in “the big picture.”
Fundrise states you can earn between 6% and 12% on average depending on the projects to invest in and you can start with a $500 investment. Remember…these are projected annual returns.
To have advanced control, you need to invest at least $1,000 to pick a more focused investment strategy to earn a higher potential yield:
- Supplemental Income
- Balanced Investing (i.e. Core Portfolio)
- Long-Term Growth
Even if you only start at $500 like I did, you can choose one of the advanced investing options when your account balance reaches $1,000.
3. Buy Farmland
If you're an accredited investor (i.e. you make at least $250,000 per year or have $1 million+ in liquid assets) you can invest in farmland. AcreTrader and FarmTogether are two leading platforms. People are always going to eat food and finding the right plot and cash crop can produce long-term profits.
4. Invest in Precious Metals
Precious metals like gold and silver have been safe havens of wealth for millennia. They also tend to appreciate in value when the stock market drops in value or inflation runs rampant. While you can already buy Gold ETFs (GLD) or invest in gold miners, the ultimate hedge is investing in physical gold.
I invest in some precious metal royalty stocks in my stock portfolio, but I also have some cash with Vaulted.
You can buy fractional shares of gold that Vaulted holds at the Royal Canadian Mint. Once you have enough to get a gold bar (or coin), Vaulted can mail your physical gold via FedEx so you can see your investment.
Instead of owning paper assets, physical gold lets you own the oldest currency that's still accepted all over the world.
Some people knock gold because it doesn't earn interest. However, you might be glad to own some if a debt jubilee comes into fruition. After all, sovereign governments own physical gold bullion as a reserve currency so why shouldn't you own a little bit too?
5. Invest in Fine Art
One alternative asset I recently discovered is fine art. One way to invest in fine art is with Masterworks.
Masterworks invests in a variety of fine art classes ranging from the classics to modern artists. Like any investment, some assets perform better than others. The minimum investments for offers start at $500. Instead of buying the entire piece (that you can't afford to buy alone), you own a tiny share along with other investors.
6. Invest in Small Businesses Loans
This is similar to a 12-month bank CD which yields up to 1.25% at best (June 2020). Except with this idea, you can make more money.
With StreetShares, your investment earns 5% annually.
The borrowers pay an interest rate higher than 5% so StreetShares. The interest rates that businesses pay can be similar to what you might pay with a personal loan.
You lend your money for business loans to veteran-owned companies. I like this idea because your money is only tied up for 12 months (1% early redemption penalty). Most stock market alternatives have a 3 to 5-year investing commitment.
The markets can look significantly different in a few years depending on whether or not businesses can pay their bills. A wave of business closures, stubbornly high unemployment rates, and low consumer spending may cause these collateral-backed loans to default.
This can be a good idea for cash you need access to in the near future, but not within the next year.
The SMBX lets you invest in individual small business bonds. You can earn up to 9% interest on your investment.
It's possible to invest in $10 increments with a repayment period of up to 60 months for most offerings. This marketplace is open to accredited and non-accredited investors.
7. Invest in Fine Wine
One alternative investing idea was only for the “ultra rich” is fine wine investing. The ideal situation is having a cellar in your own house with lots of investment wines. The next-best option is to use Vinovest.
A $1,000 starter investment with Vinovest buys multiple bottles that store in climate-controlled cellars across the world. You can sell your wines at any time but it's best to hold your bottles for up to 30 years to reap the maximum profit potential.
Vinovest states a $5,000 investment gives you a portfolio of 36 to 48 bottles. You can also have bottles shipped to your home for personal consumption (you pay the shipping costs).
It's also possible to work with a Vinovest wine advisor to build a custom portfolio with an aggressive, balanced, or conservative strategy. This can be a perfect option if you're a wine snob with deep pockets.
8. Startups and Small Business Investing
A smart friend once told me one of the best investments you can make is starting your own business. But laucnhing a business and monetizing a hobby doesn't happen overnight.
Another option (albeit with a lot of risk) is investing in existing small businesses. NextSeed is one platform that lets you invest in pre-vetted businesses from across the US.
Some of the business niches you can invest in include:
- Short-term rentals for traveling military families
- Clothing apparel companies
- Boutique hotels
- Gluten-free baking companies
This platform is open to accredited and non-accredited investors. As earning a profit isn't a guarantee, you may only decide to invest a small amount of money into each business idea. I also recommend focusing on other alternative assets that can be less risky.
9. Invest in Peer to Peer Loans
Some people have been investing in P2P loans since 2008 and have made a profit. With this alternative investing idea, you lend money directly to individuals (i.e., your next door neighbor or an anonymous co-worker).
It's possible to earn passive income with this idea, but I highly recommend you review the borrower's application. You're assuming the responsibility of a bank loan officer. Too many bad investments can result in negative returns.
Many P2P platforms offer an automated option that automatically invests in loans for you. While this can be an effortless way to earn passive income, your potential default rate can be higher.
You're investing blindly and trusting in the lender's algorithm to pick winning investments.
And the lender…well, they're happy to find an investor to fund the loan request so they can start collecting interest and fees from the borrower. Yes, I'm a little cynical with this investing idea and I urge you to do your due diligence before investing. Borrowers with an “A” credit rating still default.
LendingClub is one of the largest P2P lending platforms. You can start investing with a $1,000 investment and can buy notes in $25 increments. These small investment minimums make it easier to diversify. The projected annual return is approximately 6% by investing in 3-year and 5-year personal loans but can be higher.
Seasoned P2P investors make up to 14% (search for YouTube videos to learn their suggestions). I recommend investing in 3-year notes only and from borrowers with no recent default history.
LendingClub's automated investing feature currently invests in a borrower's loan with a credit rating ranging from A (“good credit”) to C (“fair credit”).
You can see the target allocation below to get an idea:
LendingClub is an alternative to investing in bonds that don't have the best yields as of late.
Yes, if borrower default rates start increasing the dividend returns will drop, but the same thing can happen in the bond market as companies like Toys ‘R Us and others default on their debt and go out of business. Plus, you don't have to worry about the daily price fluctuations in bonds ETFs and mutual funds that can affect the market value.
You Can't Invest in LendingClub (Yet) If You Live in These States: Alaska, Ohio, New Mexico, North Carolina, Pennsylvania
10. Stash Cash in a High-Yield Savings Account
Almost all of our money is invested in the stock market, but we also have a nest egg built up in a high-yield savings account that earns around 1.00% APY interest. This is cash that we have instant access to if we have a surprise expense. Since it's earning interest, it's better than just sitting in a checking account waiting to be spent. Even if the stock market drops 10% or a borrower defaults on a loan, our savings account shouldn't be missing a penny.
One online bank I like and belong to is CIT Bank. Their Premier High Yield Savings earns a competitive interest rate and only requires a $100 minimum deposit. There are no account fees or other annoying “bank tricks” like having to also open a checking account to enjoy special perks.
I also recommend Capital One 360 because you can build sub-accounts that help you set aside money for specific savings goals like a vacation, property taxes, or a new-to-you car. It's the digital equivalent of the envelope budgeting system that Dave Ramsey popularized.
We keep our liquid cash in a savings account so we can pounce on a good investment when the perfect buying opportunity comes. Whether it's tangible real estate, crowdfunding when lending rates rise, or stocks when valuations drop on solid investments, it's always a good idea to have some money set aside to make it easier to “buy low and sell high.”
11. Cryptocurrency Mining
While you can buy Bitcoin on Robinhood with no trade fees, you can take your crypto investing to the next level.
You can mine crypto with your home, school, or office wifi network with Coinmine.
Startup costs for a “no skills necessary” Coinmine device is $699. You can earn up to 6.5% APR on the crypto you store in your Coinmine wallet. If you're tech-savvy, you can build your own mining system using hardware you already have at home.
Potential cryptos you can mine on Coinmine include (as of July 2020):
Admittedly, I don't know much about cryptocurrency investing which is why I list this alternative investing idea last. I like the idea of cryptos as an “alternative currency” but I prefer investing in physical gold.
Don't Sink All Your Money Into These Ideas
Investing outside of the stock market can be a smart move to diversify your portfolio. Alternative assets may perform differently than stocks and bonds, but they are not risk-free. These assets may perform better than the stock market but can be riskier as you're investing in fewer assets.
For instance, an S&P 500 index fund invests in 500 different companies from various industries. But a private real estate portfolio may only hold a handful of properties across the United States. I still invest in stocks because they are still a legit way to earn passive income and build your nest egg.
- Start by investing a small amount of money (Most platforms require $500 or less to start)
- No investment is risk-free (even if you avoid stock market volatility)
- These are “buy and hold” investments that you should plan to keep for at least three years.
- If you want to withdraw cash, you might have to wait a few months to find another investor to take your place. Alternative assets can outperform the stock market because of the long-term investment period. High liquidity can increase volatility.
Whether or not you invest in all of these ideas is your choice, but it's a good idea to think of something other than the stocks, bonds, and ETFs in your 401k or retirement account.
Because these investments are “highly illiquid” they have a higher potential yield than your typical savings account, CD, or bond. But you don't have instant access to your cash. Only invest cash you don't need immediate access to.
If you want to invest entirely in the stock market, that's fine. Only invest in what you understand. If you're not sure how to invest in stocks, use an advisory service like Betterment for your personal and retirement accounts. Blooom is a great option to fine-tune your IRA, 401k, or workplace retirement plan.
Speculation can be more dangerous than you think. Stock market volatility is a perpetual investing risk and you need to ignore for the short-term.
But like any solid, timeless business, don't rely on a single income stream to provide passive income. Personally, I like to think outside the box and minimize investing risk. Investing small amounts of money in alternative assets is one way I do this. I have more ways to earn income year in and year out.
If you have free cash and the gumption, seriously consider real estate or other tangible assets you can touch and physically inspect before you buy. Don't be afraid to say “No” if you think it's a bad offer.
What do you think of these alternative investments to earn passive income and hedge against stock market volatility?
Will they stand the test of time?
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.