A Personal Account of Investments Beyond Stocks and Bonds…

It is unsure what the financial markets will do in 2022, but there is evidence that people are looking for alternatives to the stocks. Recently on the Boldin Facebook group, Mary asked a question about alternative investment companies: “Anyone have experience with Fundrise, Crowdstreet, Yieldstreet, PeerProsper or any other alternative investment companies? Responses to the question were generally positive.

Bud Hebeler’s Take on Alternative Investments

The following account of non traditional investments comes from Henry K. “Bud” Hebeler.  Bud was a frequent contributor to the Wall Street Journal, Kiplinger’s Personal Finance, Market Watch and Boldin.  While Bud died in 2017, his insights still ring true today. (Though, we would love to hear his take on Crypto.) When the stock market goes sour, people often start searching for alternative investments.  I have found a couple of things that are OK non-traditional investments, but not many.

Direction Real Estate Ownership

Real estate is likely the most common alternative to stocks and bonds.  It comes in all forms, and the results depend on personal skills, patience and luck.  For some luck examples, I once owned a skiing condo that a neighbor just had to buy—and was willing to pay above market price.  Having sold that one to him, I bought another one with the same result.  We now own our third, but I consider it a life-style, family oriented thing, not an investment. We had a friend, now deceased, who gradually assembled a portfolio of over 50 fixer-up houses which he improved himself and rented.  Eventually, he had to hire someone to do the maintenance and his son did the bookkeeping.   He took full advantage of tax-free 1035 exchanges and deductions that reduced his federal income tax to almost zero.  Eventually, he traded them into post offices where the USPS had full responsibility for the maintenance, property taxes, etc.  On his death, the cost basis was stepped up to the current market value so there was no capital gains tax when sold by the executor. Although a generous man, he looked like he would readily evict his mother if she didn’t pay the rent—a continence that may be crucial to success in that kind of business.

REITs

Real estate investment trusts, REITs, are the easiest and most liquid way to invest in real estate.  There are even REIT index mutual funds often sought as a means of current income.  That said, like any real estate, the value is dependent on interest rates and appreciation relative to inflation.Raw land is often purchased with the intent to upgrade the zoning and make a killing on the appreciation.  If it happens at all, it’s on a glacial time scale.  In the meantime, the stock market has come back. Over several years, 6 real estate partnerships were recommended to me by a financial advisor.  Four of the 6 turned out to be total losers, mostly because of big-name tenant vacancies.  One venture turned out incredibly well, but that was because the city put a subway station a block away and the property became more valuable for high-rises.  I still have one partnership left.  It muddles along, and I’d like to sell it to have more liquidity for our heirs.  But the general manager doesn’t want to sell and I can’t find other buyers. A friend had a real estate partnership for which he could not find a buyer, so he tried to give it away to a charity and get a charitable deduction.  The partnership owned properties in several states requiring appraisals in each one.  In the end, the charitable deduction hardly exceeded his appraisal and sale costs.

Oil and Gas Partnerships

Oil and gas partnerships may be the absolute worst.  When I was young, some financial magazine said the hottest thing to make money fast was some particular oil venture.  Not only was it a loser, it had horribly complex tax implications.  Friends have reported similar experiences.

Precious Metals

There are precious few people that make money on precious metals and precious stones—including me.  I remember buying some gold coins at $400 an ounce when I was young.   At today’s prices, I’ve had a 3% return over that long stretch if I could sell them at prices we read about, but you can’t sell without taking a huge cut from that guy behind the counter.  The same is true of precious stones.  Try selling a ruby or a diamond to a jewelry merchant. Older people are common targets for resort time-share sales.  Little attention is paid to the operating annual assessments and property taxes which continue until you finally find a way to unload the ownership to a secondary dealer in time shares, most often at almost 100% loss.  After a couple of years, you find that it gets more and more difficult to make plans more than a year in advance so that you can be on the phone on a day precisely 12 months ahead of your planned arrival—and hope you can beat all of the others that are making the call at the same time.

Reverse Mortgages

Reverse mortgage success is a matter of circumstances particular to an individual—the biggest unknown being when you will have to leave the home and pay back the accumulated principal and interest.  I believe that it’s important to get a professional review of your case by a CFP who can look objectively and broadly at the reverse mortgage and alternatives that might suit you better.  These are high costs loans that decidedly favor the lender, so your benefits have to be strongly biased in your favor.

Educating Children

My daughter says the best alternative investment she made is the education of her children.  In her case, it sure looks like that turned out to be true.  That said, most financial advisors do not recommend people sacrifice their retirement savings to support college costs or adult children.

Savings I Bonds

The most conservative alternative investment I have is in Savings I Bonds.  When I first started buying these, they paid an interest rate equal to inflation plus a coupon of about 3%.  Right now they only pay an interest rate equal to inflation and even that small amount is subject to income tax when redeemed.   Still, they are a lot better than a money market, short-term CD or bank savings account, and they are tax-deferred.  The disadvantage is that you must hold them for a year before cashing and hold for five years without having to take a small interest rate reduction.  After that, they are just like cash that pays some interest.

Immediate Annuities

Another conservative alternative is an immediate annuity-of which I have three.  Immediately after buying, your payments come in monthly.  The current low interest rates make these a lot less attractive now, but the investment risk is taken by the insurer who hopes you will die young.   Unless the annuity has an annual inflation adjustment, you’ll have to consider the fixed payment to be worth only the monthly quote times your age divided by 100.  That’s because you should save the rest of each payment to draw down later to compensate for inflation. Whether good or bad on my list above, it’s best to get advice from a knowledgeable professional with no financial interest in the investment.  The best is usually a fee-only certified financial planner, CFP.  He can be a good judge of your capabilities to handle an alternative investment as well as offer alternatives and an objective view of the potential investment. You can also link to learn more about: stocks, bonds and other traditional retirement investments or other non traditional investments.