How Younger Investors Can Invest Beyond Stocks Without Taking Risks They Don’t Understand
There’s a huge world of investments beyond stocks and bonds out there. The UBS Billionaire Ambitions Report shows the world’s billionaires increasing their investments in private equity, real estate, hedge funds, private credit, precious metals and commodities.
These investments have long been the playground of the wealthy. However, in today’s ever more connected world, middle class investors increasingly have access to them.
See for Yourself: Mark Cuban's Top Wealth-Building Bet Isn't the Stock Market
Check Out: 5 Low-Risk Accounts Proven To Grow Your Money Up to 13x Faster
Still, these investments each come with their own unique risks. So how can younger investors get started without taking risks they don’t understand?
Learn Before You Invest
You wouldn’t stake money on a game without learning the rules first. The same goes for real estate and alternative investments.
“Starting by learning how the investment generates returns, exactly how it’s structured and the risks associated with it,” explained Brianna Rodgers of Madison Trust Company. “Aim to build knowledge alongside your portfolio.”
Bear in mind that unlike publicly-traded investments, most private investments aren’t liquid. You can’t cash out with the click of a button in your brokerage account. Some require mandatory holding periods, often four to seven years. Others don’t have a firm exit date, while others (like direct property ownership) leave you control over the exit but it costs tens of thousands to sell.
A long-term hold is not necessarily a bad thing. It can prevent you from making mistakes like panic selling during downturns. But you do need to plan accordingly, knowing roughly when and how you’ll get your money back.
Start With Smaller Amounts
Many private equity investments like real estate syndications require high minimum investments, typically starting at $50,000. Some require $100,000, $250,000 or even more.
Fortunately, you have options to start with less.
You can start with publicly traded “paper” versions of many of these investments. For example, rather than investing directly in a real estate syndication for an industrial property or portfolio, you can buy shares of an industrial real estate investment trust (REIT). The same goes for investing in energy or precious metals.
That said, you usually don’t enjoy the full benefits of these underlying investments with the paper version. For instance, real estate syndications and oil wells come with outstanding tax benefits that you don’t get when you buy public shares. And the fees in public securities can add up faster than most investors realize.
The greatest problem with many paper assets like REITs is their close correlation with the stock market at large. That defeats the entire purpose of diversifying outside your stock investments.
Crowdfunding platforms remain an option, but most charge hidden fees and simply haven’t performed well over the long term.
Explore reputable co-investing clubs that let you go in on private investments with relatively small amounts, such as $2,500 instead of the typical $50,000 or more.
Consider Real Estate Before Alternatives
Pop quiz: What’s the difference between investing and speculating?
Investments generate income and you can use that income to measure their value. You can calculate the price-to-earnings ratio for a stock for instance or the cap rate on a real estate investment. “Start with cash-flowing investments, as you enter the new world of private investments,” said Dr. Bharat Sangani, founder of Encore Enterprises. “In many cases, they can produce better returns than the traditional bond-equity play.”
Speculative assets don’t generate income — you simply hope that someone will pay you more for them in the future. Precious metals, cryptocurrencies and collectibles offer classic examples.
There’s nothing intrinsically “bad” about speculating, but that should come last, after you’ve built a solid financial foundation.
Focus on Financial Fundamentals First
Before you start playing in the realm of private equity, real estate syndications, private credit and alternative investments, make sure you have the fundamentals laid first. That includes building an emergency fund, taking advantage of employer matching contributions, paying off high-interest debt and funding your IRA.
Likewise, get intentional about your asset allocation before you invest. That might mean starting with 5% of your portfolio in private investments, before eventually ratcheting it up as you build wealth.
You can’t eliminate risk from any investment. But you can — and should — understand which risks come with each investment before you put your hard-earned money into it. That goes for publicly traded assets and it applies just as much for private assets.
Editor’s note: Investing involves risk, including the possible loss of principal. Always consider your individual circumstances and consult with a qualified financial advisor before making investment decisions.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
More From MoneyLion:
