Many people tout the virtues of stock investing, especially because history shows that the stock market has provided one of the greatest sources of long-term wealth, with compounded returns averaging 10 percent per year over the past 100 years. Investors that keep stock for the long term, hold shares in a low-cost index, reinvest their dividends, take advantage of tax rules, and let compounding do all of the heavy lifting have seen the best returns.
Over the same 100-year period, inflation averaged 4 percent, leaving a modest, yet consistent 6 percent real rate of return. Corporate advisor Duff & Phelps produces the Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook (formerly Ibbotson SBBI Yearbook), which compiles extensive data on these returns in its annual publication.
Stocks Don’t Always Make Sense
Although a 6-percent post-inflation return sounds pretty decent, according to a study performed by investment research company Morningstar, during a period of 10 percent (pre-inflation) market returns, the average investor actually earned only a 3 percent net investment return. Poor investing choices, too-frequent trading, high-cost brokers, mutual fund sales loads, and a host of other fees and errors secretly frittered away most of the investing profits. Keeping an eye on each of these factors requires time, effort and knowledge, convincing some people to look for other investing alternatives to stock.
Some people don’t have the desire or temperament to invest in stocks. While this could handicap you with one less tool in your wealth-building toolbox, your honest self-appraisal can also help you avoid future investing mistakes. You can still invest your money into several other types of assets to earn a return, reduce your risk and diversify your portfolio.
For those new to investing who still question their interest in stocks, how do you know if you’d be better off skipping stock investing? Look for these signs:
- You get physically ill seeing stock prices fall as other investors panic instead of seeing it as an opportunity to be seized.
- You can’t explain what the bid price/ask price and spread/market maker are or do.
- You lose sleep and worry a lot over owning stocks.
- You have thought, or said, that “the stock market is like a casino.”
- You think a stock split is a bonus (fact: it’s meaningless).
- You don’t understand how, in some situations, a $100,000 per share stock can be cheaper than a $3 per share stock.
- You can’t read an income statement or balance sheet.
- You can’t make sense of an annual report or 10K.
- You don’t know what the earnings yield is.
- You don’t know what the price-to-earnings ratio is.
The stock market is equal-opportunity for anyone who wants to acquire the knowledge or find a good broker to help them invest, but if the above-mentioned signs resonate with you, it’s wise to check out alternative places to invest your hard-earned dollars.
Some Popular Alternatives
If you want to earn a good after-tax, net-of-inflation return without investing in stocks, two popular and reasonable alternatives are owning a business that you operate and owning a portfolio of real estate assets that generate rental income.
Every investment has its own personality quirks, and not to discourage would-be business owners, but It takes a unique, varied skill set to be a profitable business operator. Some very intelligent people, if they had to run a simple business like a Dunkin’ Donuts franchise, would be bankrupt in a year. You’ll need an attention to detail, an eye for cost control, knowledge of when to invest in capital expenditures that improve customer experience and increase profits, and a system to monitor the return earned on your total investment—while simultaneously protecting cash flow, vetting employees, handling business licenses, and putting the right advisers in place. Some people feel excited and inspired by the challenge, while others feel exhausted just reading about all that small business ownership requires.
Many investors gravitate towards buying and managing real estate investments because they are tangible and can offer a fairly passive form of income. Many sub-specialties exist for those who invest in real estate, including individual rental houses, apartment buildings, storage units, car washes, office buildings, industrial buildings, and even real estate options or tax lien certificates. Each investment has its own benefits and pitfalls, appealing to different types of people.
Not Everyone Likes Real Estate or Private Businesses
Let’s say you’ve already got money tied up in real estate and have your own business, or maybe both of those options sound unappealing or uninteresting. You might consider some other asset types, such as silver and gold, cash and cash equivalents such as money market accounts or certificates of deposit, foreign currencies or high-grade corporate bonds. Each of these investment options has its own learning curve, its own risk profile and its own range of returns.
When considering your non-stock investment choices, keep in mind one of the cardinal rules of investing: Never invest money that you can’t afford to lose. That being said, decide how much time you want to have your money locked into your investment, and take note of the liquidity of that asset’s market. For example, you can buy and sell public stock at a moment’s notice because the market has so many willing buyers and sellers. At the other extreme, if you invested your money into gemstones, collectible coins, and classic cars because these markets have less activity, it would require more time to cash out your investment in the event you needed the money quickly. Real estate and owned businesses have a similar challenge, although they make for more reliable collateral sources if you need to take a loan in an emergency