Alternative Investments

Non-stock ways to grow and protect your wealth

Real Estate, Gold and Fine Art

The S&P 500 is up almost 15% in the past year, although just 3% year-to-date—after recovering from the March COVID-related downturn. Some market gurus think the market is getting overheated. The P/E ratio (Price/Earnings) for the S&P 500 stands at 28.8 today, and that is considerably higher than its historical 15.8 average for the past 140 years.

I’m not going to weigh in on that school of thought today. But I’m always thinking of where to invest during those cycles when the market does turn down. And while I always have some money in the market, it doesn’t hurt to investigate other types of investments, too.

I’m talking about alternative investments, financial assets that usually are not included in your 401k options. They don’t fall into one of the conventional investment categories like stocks, bonds, and cash. Instead, they can include private equity or venture capital, hedge funds, real property, commodities, as well as tangible assets, such as art, coins, bullion, wine, and antiques.

Alternative assets can be an attractive way to increase the diversification of your portfolio. In general, they have a low correlation with standard asset classes—meaning that often, if stock and bond markets go up, their value goes down—and vice-versa. They can also be a great hedge against inflation (which decreases the purchasing power of money).

Alternative investments are mostly held in the hands of accredited, high-net-worth individuals (investors with a net worth of at least $1,000,000, excluding the value of your primary residence, or have income at least $200,000 each year for the last two years, or $300,000 combined income if married), or collectors who specialize in certain intangible assets.

There’s a reason for that: alternative investments can be complicated; most aren’t regulated; they are generally illiquid; and they can be pretty risky. And while most people think that large institutional investors such as pension funds and private endowments are ultra-conservative, even these investors often include alternative investments in their portfolios, albeit, a small, usually less than 10%, allocation.

However, even non-accredited, individual investors have access to alternative investments today, in the form of alternative funds—ETFs and mutual funds that include portfolios of non-stock and bond investments. The big advantage for investors with these funds, of course, is that they are regulated by the Securities & Exchange Commission (SEC). The caveat is that most of these funds haven’t been around very long, so historical performance data is limited (most of them came onto the market since 2008, so haven’t experienced a lasting market downturn yet). Additionally, their track records are so-so.

For example, here are 1- and 3-year returns for a few alternative ETFs:

ETF Symbol 1-yr Return (%) 3-yr Return (%)
SPDR Dow Jones Global Real Estate Fund DJRE.AX -21.93 -0.53
Invesco Global Listed Private Equity ETF PSP -4.71 1.83
United States Oil Fund, LP USO -71.00 -26.43
iShares Gold Trust IAU 27.72 13.88
 

IQ Hedge Multi-Strategy Tracker ETF

QAI 2.58 2.63

As you can see, with the exception of gold, most of the returns haven’t come anywhere near the market returns. However, that’s because—with the exception of the March market debacle—we’ve been in a bull stock market for 10 years. Remember, it’s when the market is off, that alternative investments shine.

So, now that we’ve defined alternative investments and talked about some of the risks, let’s delve deeper into my three favorite—and some of the most popular—alternative investments.

Physical Real Estate
Of course, you can purchase shares in more than 200 Real Estate Investment Trusts, where you own the shares, not the real property. But there are plenty of investors who also like to buy the tangible asset. And that is right up my alley! Many of you know that I own a small real estate company, so be aware, that I’m an enthusiastic real estate investor. I’ll try to stick to the facts, so I don’t overly influence you!

Investing in real estate properties is the most common alternative investment. There are three main goals in real estate investing: 1) invest in a property that is undervalued and flip it to make money; 2) buy a fixer-upper, rehab it, and flip it; and 3) buy a rental property to generate long-term income.

The downside is you need to thoroughly investigate the overall real estate market, the rental market, the investment opportunities, and location, location, location—before you buy. Just like with a stock, when you buy what you consider to be an undervalued company, if no one else wants in on it, you could be holding that stock for a very long time, waiting for it to appreciate. It’s the same with real estate; you need to do your homework (and hopefully, have a good real estate broker to help you), to ensure you are buying in a good flip or rental market, and in the right location.

Here are some tips to get you started:

  • You’re going to need at least 20% down, in most cases.
  • Consider current interest rates. If you need to borrow to buy the real estate, you’re going to want your borrowing costs to be as low as possible.
  • If you are flipping, calculate your rehab budget.
  • If you are going to be a landlord, brush up on landlord laws, consider if you have a ‘landlord’ personality, and calculate rehab, as well as ongoing repair and maintenance (usually about 1% of the property value, annually).
  • Estimate insurance, taxes, and any HOA fees.
  • Calculate your operating expenses. Estimate between 35%-80% of your gross operating income, but usually average around 50%.
  • Estimate other expenses (there will always be some!) Expect those numbers to be as high as 30% of your operating income.
  • Determine your return. For every dollar that you invest, what is your return on that dollar? Most individual real estate investors look for an average of 10%. That’s about what stocks have returned for their entire history.

Owning investment real estate can be very time-consuming, and the financials can be complex. So, you want to make sure you have a good CPA.

On the other hand, many fortunes have been made by investing in real estate. Just ask Sam Zell (an early investor in Real Estate Investment Trusts, worth $4.8 billion) or Mort Zuckerman (worth about $2.6 billion; made his fortune in publishing and investing in REITs).

Real Estate Crowdfunding. Crowdfunding is another way to buy physical real estate. It came into being with the Jumpstart Our Business Startups (JOBS) Act of 2012. Crowdfunding is sort of like a mutual fund, where investors pool their money. It’s driven by investors who find each other via social media. In the beginning, only accredited investors like banks, pension plans, insurance companies as well as affluent, sophisticated investors, were allowed. Individuals had to earn $200,000 and have a net worth more than $1,000,000. The SEC has since reduced those restrictions and now individual investors need as little as $500-$1,000 to participate.

But there are some limitations:

If either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or 5% of the lesser of your annual income or net worth.

If both your annual income and your net worth are equal to or more than $107,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $107,000.

Here are some examples of crowdfunding platforms for non-accredited investors:

Platform Website Min Investment ($) Fees (%) Avg Returns (%) Investment Options
Fundrise fundrise.com 1,000 1.0 8.7-12.4 eREITs/eFUNDs
RealtyMogul realtymogul.com 5,000 1.0-1.5 4.5-8 REITs, individual properties, 1031 exchanges
DiversifyFund Diversifyfund.com 500 0 11-18 REITs

Source of data: Investopedia.com

Note: eREITS are REITS sponsored by an investment company platform (like Fundrise). eFUNDs allow investments directly into a diversified portfolio that aims to develop new homes.

Please understand that I have no experience with these platforms, so I’m not recommending them. I am just bringing them to your attention as examples of this ‘new’ type of real estate investing.

Fine Art
If you’ve ever watched Antiques Roadshow, you’ve seen the hapless consumers who found an ugly old painting at a garage sale, and who almost fainted at the prices these objects were estimated to bring. One of the most expensive finds was in Birmingham, Alabama. A man brought in an 1896 portrait of his great-grandfather that was painted by a friend. The friend was Frederic Remington, and the painting was valued At $600,000-$800,000.

That was just dumb luck, and that’s not what I’m talking about here.

People have been investing in art for as long as there have been artists. During the Renaissance, the Medici family was famous for many things—wool, banking, science, and architecture. But their greatest claim to fame was backing artists. For more than 200 years, various family members were patrons to a variety of artists, including painter Masaccio, architect Brunelleschi, and artists Michelangelo, Raphael, Donatello, and Leonardo da Vinci, supporting them while they created their work. In return, these patrons turned Florence, Italy into a premier art center and laid claim to thousands of paintings by renowned artists.

While the great art patrons may have disappeared, there are still galleries, societies, and individual art afficianados who do sponsor artists, or who just collect art. Whether it be antique dishes or jewelry, old Master paintings or the work of nouveau artists, there are plenty of collectors around. In fact, I recently read a report that said 55% of wealth managers had been asked to help their clientele with investments in art and collectibles. The global art market is alive and well, and in 2019, it was valued at $64.1 billion.

Some of the largest art collections in the world are owned by Lebanese art family members Ezra and David Nahman, estimated collection value, $3.3 billion; media giant David Geffen, $2.3 billion; and hedge fund manager Steve Cohen, $1 billion.

And art has been a good business for investors. Between 1985 and 2018, Citibank says that the art market’s return has been relatively in line with that of fixed income (although more volatile). The market averaged returns of 5.3%, with contemporary art the leader, posting gains of 7.5%.

During the same period, investment grade bonds from developed countries returned 6.5%, while global high yield bonds averaged 8.1%.

You don’t have to be a billionaire to be a collector. But you do need to know that it is a risky business. Art, antiques, and collectibles all have ‘hot’ and ‘cold’ cycles. With many artists—especially the newer ones, their works tend to sell the most after they die. And the cycle constantly changes. Right now, predicted trends for fine arts for the next decade include female, African American and Latino artists, as well as Cyberpunk color schemes, street art styles, paper cut-out collages, continuous animation sequences, and live data visualization. But, that, of course, may change tomorrow!

So, how do you get started in investing in art? Here are a couple recommended steps:

Define your style. Hopefully, you’ll start by buying what you like. But, is that contemporary art or the Old Masters? New or well-known artists? Abstract or still life? Oil or pastels? Sculpture or glass? You can see, the choices are enormous.

How much can you afford to invest? You don’t have to spend a fortune. According to Artprice, half of the sales of contemporary art from 2018-2019 were under $1,000. And just 3% were more than $100,000. You can also find great art at local galleries, studios, or art fairs. Those will generally feature up-and-coming artists, and at affordable prices. Alternatively, auctions—especially at the big auction houses like Christie’s or Sotheby’s—are going to feature some pretty expensive pieces, like the Top Ten Art Sales of all time in the following table.

The Top Ten Art Sales

Adjusted price
(in millions)
Original price
(in millions)
Painting Artist Year Date of sale Auction house
$469.7 $450.3 Salvator Mundi Leonardo da Vinci c. 1500 November 15, 2017 Christie’s, New York[17]
~$324 ~$300 Interchange Willem de Kooning 1955 September 2015 Private sale[18]
$284 + $250 + [note 3] The Card Players Paul Cézanne 1892/93 April 2011 Private sale[19][20][21]
$227 $210 [22] Nafea Faa Ipoipo
(When Will You Marry?)
Paul Gauguin 1892 September 2014 Private sale[23]
~$216 ~$200 Number 17A Jackson Pollock 1948 September 2015 Private sale[18]
$201.7 $183.8 Wasserschlangen II Gustav Klimt 1904–07 2013 Private sale [note 4]
$201 $186
(€140)
No. 6 (Violet, Green and Red) Mark Rothko 1951 August 2014 Private sale via
Yves Bouvier[26]
$194 $180
(€160M)
Pendant portraits of
Maerten Soolmans
and Oopjen Coppit
Rembrandt 1634 September 2015 Private sale
[27]
$193.5 $179.4 Les Femmes d’Alger
(“Version O”)
Pablo Picasso 1955 May 11, 2015 Christie’s, New York[29]
$183.8 $170.4 Nu couché Amedeo Modigliani 1917/18 November 9, 2015 Christie’s, New York[31]

Once you’ve answered those two questions, here are a few other things to consider:

  1. Who is the artist? Consider awards received, gallery exhibitions, organizations he is involved in, teaching positions at college or university level, and a list of collectors for his work.
  2. How significant is the art? Is it original or reproduced mechanically? Does the artist have a large collection of work? Does this piece stand out from his other work? Is it unique?
  3. What is the art’s provenance, history, and documentation (or more simply, where has the art been and who’s owned it)? This becomes very important if you decide to sell the piece one day.
  4. Is the asking price fair? To answer this question, you’ll need to compare the price of this art to records of public and private sales of similar works. There are databases for auctioned art, including com/price-database/ and Sotheby’s sia.libguides.com/az.php?t=14137. And you can check various galleries and ask the selling prices of this artist’s (or similar artists) work. You can also ask the artist for records of his previous sales. Lastly, there’s an app called Magnus. If you’re shopping for art, take a picture of it from the app, and you’ll get the name of the artwork and the artist, plus current and historic price, dimensions, and material. And it’s free!

Now, in addition to buying individual art, you can also invest through an art investment manager, some of whom have created art mutual funds. These funds first came into being in 1974, but proliferated after the 2008 global financial crisis. Since then, they have dwindled somewhat. And most are limited to accredited investors, with minimums ranging from $500,000 to $1 million.

Here are a few for your review:

Anthea – Contemporary Art Investment Fund SICAV FIS, anthea-rt.com/fund.asp?idp=2&ids=3

Saatchi Art, saatchiart.com/invest-in-art

Arthena, arthena.com/

There are some other, newer art fund managers around, but do your research before you invest in a fund or with a manager. Make sure you investigate fees, expense ratios, and performance. Just realize, that these investments are private and are not regulated by the SEC.

And then, there is Masterworks—founded in 2017, Masterworks is the first investment platform for fine art. The company buys the art and investors purchase interests (or shares) in a painting similar to the way investors purchase shares in public companies. So, you don’t own or store the art. Instead, you and other investors own a piece of high-value works vetted by experts for authenticity. Their minimum investment is $1,000—pretty reasonable. Fees are 1.5% annually and 20% of a sale, and investment length is 5-10 years. The company’s website is: masterworks.io/.

Again, I am not recommending any of these investments or platforms; just sharing my research.

Gold
Investors have had a very long love affair with metals—gold, silver, platinum, especially. There’s just something about holding the metal in your hand that feels really special. Sure, you can buy shares in a gold mining company, a mutual fund or exchange-traded fund (there are 9 ETFs just for gold!), to give you exposure to the metal, but many investors opt for the real thing. After all, the stocks and funds can go up or down, independent of the actual metal’s price, and can carry risks, such as geopolitical, natural disaster, and undeveloped country labor risks that you won’t incur when you own the actual metal.

The oldest gold treasure hoard in the world dates from 4,600 BC to 4,200 BC and was discovered at a Bulgarian burial site in Varna. Darius the Great, ruler of the Persian Empire, minted the very first gold coin, the “daric” to expand his army into foreign territories. And many countries used the gold standard up until the 1930s.

The value of gold is determined by the market 24 hours a day, seven days a week. And, as you can see from the chart below, it can fluctuate wildly.

Gold prices are not affected so much by supply and demand. Instead, sentiment plays the larger role. The more uncertainty in the world—geopolitical or economic—the higher the price of gold goes. And ditto for inflation; as it rises, so does gold. COVID-19 has given gold a huge boost, even though the stock market has been on a bullish high. Usually, they move in contrast to each other, but the coronavirus has spooked many investors, who have started loading up on gold. The metal closed at $1,680.78, as I write this, up 29.5% from last year.

There are several ways in which you can buy gold (or silver, but we’ll just concentrate on gold here, as it is the most popular metal to own).

Bullion and Bullion Coins. Bullion is a bulk quantity of gold, sold by weight and generally comes in ingots or bars. You can buy it through dealers, some banks and brokerage houses. Bullion bars are generally bought by large investors.

You can also purchase bullion coins, such as the American Eagle and the Britannia, as investments, through some banks, brokerage firms, and precious metals dealers. The South African Krugerrand, launched in 1967, was the very first coin designed specifically for investment purposes. The coins are usually valued by their precious metals content rather than by rarity and condition. Prices can change constantly, depending on the prices for precious metals in the world markets. Since 1986, the U.S. Mint has produced gold and silver bullion coins for investment purposes. It guarantees the precious metal weight, content, and purity of the coins it produces.

Some dealers offer storage, but if you choose to store your bullion or bullion coins yourself, you’ll need a safe deposit box or safe. And please recognize that these are illiquid investments. Unlike a stock, bond, or mutual fund, you can’t automatically sell them at any time for the specified price that you want.

According to silver.com, these are the 10 Best Gold Coins for Investing:

  1. American Eagle 1-Ounce Gold Coin. At 91.67% fineness, its 22k alloy contains 3% silver and 5.33% copper for durability, with the U.S. Mint’s guarantee of content and purity. You can buy them in two ways: proofs and uncirculated coins. Proofs provide finer detail due to multiple strikes on a mirrored blank in the minting process. Uncirculated coins, however, are burnished blanks fed by hand into a coin press and carry the West Point mint mark. Despite its $50 legal tender value, the American Eagle contains one troy ounce of pure gold. Since they are so popular, they are fairly easy to value, trade or sell, and are also approved for Individual Retirement Accounts (IRAs).
  2. American Buffalo 1-Ounce Gold Coin. This coin offers .9999 fine 24k gold, and is the purest, highest content gold coin the U.S. Mint produces. It also carries a $50 legal tender value. The American Eagle includes some silver and copper to increase durability, but the American Buffalo is purely one troy ounce of 24k gold, which makes it softer and more susceptible to wear or damage.
  3. Canadian Maple Leaf 1-Ounce Gold Coin. This coin is four 9s fine and is the 24k baseline and staple for gold 1-ounce coins. It carries a legal tender value of $50 Canadian backed by the Royal Canadian Mint. Gold coins produced from 1979 to 1982 carry three 9s while those after, carry four.
  4. British Britannia 1-Ounce Gold Coin represents the British Royal Mint’s contribution to the 1-ounce gold coin investing, and carries a £100 face value. Coins dated 1987 to 2012 are 22k—the first 2 years alloyed with copper, the next 23 with silver, while those dated 2013 or later are 24k. All contain a full troy ounce of gold.
  5. South African Krugerrand 1-Ounce Gold Coin is usually one of the least expensive gold coins and instantly recognizable with its springbok antelope. Investors have purchased more Krugerrands than all of the other 1-ounce gold coins together. The Krugerrand is 22k, and contains 8.33% copper to stabilize its one troy ounce of gold. They are very popular and are also usually easy to sell. The Krugerrand’s value corresponds directly to the rand-dollar exchange rate and the current dollar gold price, so establishing value is relatively straightforward. In 1980, Krugerrands also became available in 1/2-, 1/4- and 1/10-ounce sizes.
  6. Austrian Philharmonic 1-Ounce Gold Coin are the largest in diameter of all the 1-ounce gold coins, at 37 millimeters. They are .999 fine 24k, and are the only gold bullion coins issued in euros. They are backed by the Austrian Mint.
  7. Canadian Maple Leaf 1/2-Ounce Gold Coin is a 24k fractional coin, and is also .9999 fineness. Its quality and weight are guaranteed by the Royal Canadian Mint, and they carry a legal tender value of $25 Canadian and weigh 1/2 troy ounce of gold.
  8. American Eagle 1/2-Ounce Gold Coin. The coin is 22k but contains a full half ounce of gold along with a silver-copper alloy to make it more durable.
  9. Canadian Maple Leaf 1/4-Ounce Gold Coin has a legal tender value of $10 Canadian, and is 24k gold.
  10. American Eagle 1/4-Ounce Gold Coin is 22k gold and because of its small size, are often more easily bought and sold than their larger peers.

Collectible Coins. These coins usually have some historic or aesthetic value to collectors, and are easy to store. Most have a market value higher than their face value or their metal content, called the numismatic value. The coin dealers who sell collectible coins often have valuable coins graded by professional services, but grading can be subjective.

Collectible coins come in all shapes and sizes. According to bankrate.com, here are the 7 most Valuable Collectible Coins as of June:

  1. The 1794 Flowing Hair Silver Dollar is the most expensive coin ever sold. It went for $10 million in 2013. Some believe that it was the first silver dollar struck by the U.S. Mint, and fewer than 1,800 were produced. It’s believed that there are only 120-130 remaining.
  2. The 1787 Brasher Doubloon was made by Ephraim Basher, a New York City goldsmith and silversmith, and has several versions. One sold for $7.4 million in 2011.
  3. The 1787 Fugio cent, also known as the Franklin cent (after Ben Franklin) may have been the first coin circulated in the newly formed United States. Warren Zivi, head numismatist and president at American Rarities, says you could buy a Fugio cent for a few hundred dollars, but coins in better condition may cost $1,000-$10,000, and really rare ones can go for tens of thousands.
  4. The 723 Umayyad Gold Dinar is one of the most prized Islamic coins, as it was struck from gold mined at a location owned by the caliph. Only about a dozen examples remain, and one was sold last year for $4.8 million.
  5. The 1343 Edward III Florin. Only three remain. Two are in the British Museum in London, found in the River Tyne in 1857. The third one was found by a prospector with a metal detector in 2006 and sold for $850,000 at auction—a record for a British coin. The estimated value today is around $6.8 million.
  6. The 1943 Lincoln Head Copper Penny. Unlike the copper and nickel pennies that were made at that time, the need for those metals during WWII caused the mint to start using steel. However, the mint made a mistake, and made a batch of pennies with copper, about 40 that still exist. A steel 1943 Lincoln penny might sell for 30 or 40 cents, but one of these special copper pennies sold for $204,000 at a 2019 auction.
  7. The 2007 $1 Million Canadian Gold Maple Leaf is pure gold and is the world’s largest gold coin, weighing 220 pounds. Only six were made and each has a face value of $1 million. One of them was sold at auction in 2010 for about $4 million.

Now that you know there are several different ways to buy gold, let’s talk about some fun facts about buying gold:

  • As I said above, the price of gold fluctuates over time. There is no guarantee that it will increase in value.
  • You should also know that when you buy bullion or coins from a dealer, bank, or brokerage firm, you will be paying more than the actual value, so it pays to shop around. It’s also very important to use a reputable dealer. You can Google them and read their reviews. You can also check with your state Attorney General and local consumer protection agency for any complaints. And don’t be persuaded by celebrity endorsements—they are meaningless.
  • You might also want to get an independent appraisal for the gold product you are purchasing.
  • Consider additional costs, like insurance, a safe deposit box, or the lease on offsite storage. These expenses will lower your investment return. to safeguard bullion.

Here are a few websites for additional resources:

  1. Commodity Futures Trading Commission: gov
  2. S. Mint: usmint.gov
  3. S. Securities and Exchange Commission: sec.gov and investor.gov
  4. American Numismatic Association: org
  5. National Futures Association: org
  6. World Gold Council: org

There you have it—my 3 favorite alternative investments. Yes, they require a little more homework than investing in a stock, bond, or fund. And, yes, their value will mostly likely fluctuate a lot, and they each come with their own risks.

However, if you choose to invest in any of them—real property, fine art, or gold—you’ll not only have an actual real asset that you can touch and show off to your friends, but you will also increase the diversification of your investment portfolio, and that’s a smart move.

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