Tech companies have long sought to reform the financial industry with new products and services. Robo-advisors have drawn billions in assets from financial advisors, Robinhood helped eliminate commissions for traders, and budgeting apps have made it trivial to categorize expenses each month. Some tech companies have even developed new asset classes.
Let’s take a look at some popular alternative assets for your portfolio and whether you should consider them.
Cryptocurrencies have grown from an obscure hobby project to a multi-billion dollar asset class over the past decade. While crypto enthusiasts believe they may one day replace fiat currency, institutional investors are interested in digital currencies for their diversification and lower transaction and storage costs compared to precious metals.
The CME Group recently launched Bitcoin futures and plans to launch options on those futures in January 2020. While several issuers have made an attempt, the SEC hasn’t approved any Bitcoin exchange-traded funds (ETFs) or exchange-traded notes (ETNs) in the United States. There are several foreign Bitcoin ETNs, but they aren’t easily accessible to individual investors.
- Cryptocurrencies are relatively uncorrelated with traditional assets, which could increase diversification and improve overall risk-adjusted returns in a portfolio.
- Cryptocurrency transaction and storage costs could become lower than precious metals — their closest proxy — over time as the underlying technology improves.
- Cryptocurrencies tend to be more volatile than the S&P 500 index and other traditional assets, which means they may not be appropriate for risk-averse investors.
- Cryptocurrencies do not generate any cash flow and don’t hold any physical assets to back up their value, which means that they could lose all of their value.
- As a relatively new asset, it is still unknown exactly what role cryptocurrency and blockchain will play in the future.
- The same benefits that protect cryptocurrency from theft have also caused millions of dollars to be “lost” due to lost passwords and access to wallets.
Most banks generate profit from net interest margins, or the difference between the amount they pay depositors and charge borrowers. Not surprisingly, tech companies believe that they can eliminate these ‘inefficiencies’ in the market by facilitating direct peer to peer lending, particularly for less creditworthy borrowers that have few existing options.
Upstart, Funding Circle, Prosper, CircleBack, Peerform, Lending Club and other platforms enable investors to lend money to borrowers at annual percentage rates (APRs) of between 5% and 30%, depending on the credit risks involved. Investors can also choose between various types of borrowers and loan types, from small business loans to medical loans.
- P2P lending could yield more than dividend stocks and bonds since it cuts out the middleman (e.g. banks) and enables individuals to receive the full net interest margin.
- P2P lending offers many different options when it comes to lending to credit worthy vs. non-credit worthy and businesses vs. individuals, depending on your goals and risk tolerance.
- Significant due diligence is required to ensure that you build a portfolio that reflects your risk tolerance and investment goals — there are no one-size-fits-all options.
- Investors must actively manage their portfolio over time as loans mature or default. The portfolio management process can eat up much more time than passive investments.
Crowdfunding Real Estate
Most homeowners have benefited from the long-term appreciation of their house value. While some have dabbled in rentals, it’s a time-consuming process that involves a lot of legal paperwork, maintenance headaches, and other issues. There’s also a high capital requirement to buy a property or hold a second mortgage that increases your debt load.
Crowdfunding has opened the door to more affordable and diversified real estate investments. Platforms like FundRise enable anyone to invest in high-end apartment complexes and receive a portion of rental income each month along with the ability to participate in any capital gains upside — all with a relatively small minimum investment.
- Investors can generate real estate income with small initial investments and less time associated with buying and managing their own properties.
- Real estate can help diversify a portfolio of stocks and bonds by adding an alternative asset class that’s not necessarily correlated to conventional asset classes.
- Most crowdfunding platforms seek to reduce the cost of real estate investments, which are typically very expensive.
- The management fees charged by crowdfunding platforms can be both high and opaque. These fees can cut into the returns that you expect to earn over time — especially in down markets.
- Real estate portfolios may be overly concentrated in certain areas and may be subject to risk during a downturn. There’s no guarantee that real estate assets will continue to rise.
Stick to What You Know
Tech companies continue to develop new investment products, services, and asset classes. Despite their sleek marketing, these products may not be right for every investor — particularly risk-averse investors with retirement portfolios. You should understand the risks involved before investing in these ‘unique’ new assets.
The common thread between these opportunities is that they require more hands-on management and expertise in order to succeed. Since most people aren’t familiar with cryptocurrency, real estate or lending, these may be opportunities that are best left to professionals that already operate in the space and know the risks and rewards.
New investment opportunities are also a popular way to scam investors. Since they are often misunderstood and unregulated, unsavory people flock to these investments to steal from unsuspecting victims. ALWAYS avoid any unregulated investment with guaranteed performance — this is a recipe for disaster.
Any new investment should be approached with caution. New assets can look very appealing, but you should never invest all or a large percentage of your portfolio in these new products. It’s still best to use the stock and bond markets that have helped investors make money for decades.
If you are trying to generate more income, you can use existing investment strategies rather than looking at alternative assets. Snider Advisors specializes in helping investors learn to use covered call options as a way to generate income from a portfolio of stocks. By taking this approach, you can generate an income without sacrificing the benefits of the stock market.
Sign up for our free e-course to learn more about the strategy and how you can increase your portfolio income.
The Bottom Line
Tech companies have introduced a number of new ‘unique’ asset classes over the past decade, including cryptocurrencies, peer-to-peer lending, and crowdfunded real estate. While these assets promise higher returns than their conventional counterparts, you should carefully consider the time commitment and risks involved with them.
In particular, retirement investors may want to look toward safer ‘known’ asset classes to preserve their capital and generate a consistent income in retirement. The Snider Investment Method and other strategies can help boost this income without resorting to cutting-edge and unproven asset classes that could be too risky.