Kim Butler

Co-founder at The SUMMIT for Advisors

| Best-Selling Financial Author | Founder of Partners for Prosperity, Inc.

Investing Outside of the Stock Market

May 26, 2015

“Some people don’t like change, but you need to embrace change if the alternative is disaster.”– Elon Musk

Investors have short -term memories, which is why so many are optimistic about the stock market right now. But if you think the stock market is headed for a correction or even a crash, you’re in good company. And if you aren’t sure WHERE to invest OUTSIDE of the stock market, you’re not alone by a long-shot.

Even nervous investors still cling to the stock market because:

1. They aren’t open-minded to try something new, even if they are unsatisfied with their current strategy.
2. People mistakenly believe that the risk and roller coaster ride is required if they want to earn a good rate of return in the long run.
3. Some investors just aren’t aware of other options. They lack the knowledge, confidence, and guidance to seek better alternatives.

Typical financial advice tends to give very limited options, fixating on “how much of your portfolio should be in stocks, and how much in bonds.”
We say, “Neither of the above!” Stocks and mutual funds are ultimately nothing more than speculation, and bonds (depending on if you’re talking high quality bonds or junk bonds) range from risky with fair returns to safe, but with weak returns.
Are you really stuck between high risk and low returns, as typical financial planning would have you believe? No, you’re not! In this article, we name our favorite investments notcorrelated to the stock market.

Life Settlements: Perhaps the Best Investment Outside the Stock Market

For those looking for excellent growth with minimal risk, life settlements are a very attractive option, offering investors a way to participate in the secondary market for life insurance policies.
Just as real estate deeds of trust can be bought and sold, so life insurance policies and the assets they represent are bought and sold on the secondary market. Life insurance has been considered an asset class since a Supreme Court ruling in 1911 judged that life insurance policies are private property that can be assigned or sold to others at the will of the policy owner.
Life settlements invest in life insurance by purchasing policies that have become unwanted, unneeded, or unaffordable to elderly policyholders. In this way, they represent a true “win-win” scenario.
Policyowners nearing life expectancy are able to turn a death benefit into a living benefit they can use now. At the same time, investors are able to purchase an asset with a sure future value, rather than grow an asset with an unknown, perhaps even lower future value.
Although most investors have never heard of life settlements, they have been used in institutional investing for decades. Some of the reasons life settlements have grown in popularity include:

• Returns are non-correlated. Life settlement investments are not correlated to interest rates, housing prices, stock prices, political events, or any outside influences.
• Almost no downside risk. Life settlements are based on actuarial math, not stock market speculation. As policies are purchased for a discount and costs such as future premiums are factored in, losses are unusual.
• Healthy returns. It is typical for investors to see annualized returns in the low double digits, though results vary.
• High Safety. Life insurance companies are among the strongest financial institutions in existence. Only seasoned policies are purchased for life settlements, and death benefits are always paid when the time comes.

Formerly for institutional investors only, there are now options for accredited  investors (with a net worth of 1 million and cash flow of $200k or $300k for couples) to purchase private equity funds that hold life settlements.
As with any investment, it is important to understand how it works and who it is best suited for. Life settlements are not liquid and the investment time frame and exact rate of return fluctuate. Required minimum investment with our life settlement partners currently begins at $100,000, and money is typically invested for 7-10 years.
For more information, listen to this introduction to life settlements in “An Introduction to Life Settlements” on The Prosperity Podcast. 

Commercial Bridge Loans: Our Top Investment for Cash Flow 

Bridge loans on commercial and investment property can be an excellent choice for investors looking for immediate, steady, substantial income. Bridge loans also allow investors to capitalize on real estate without the hassles of being a landlord.
Also known as “hard money loans,” sometimes they are “rehab loans” as well (though not always), bridge loans provide temporary financing, usually for periods of about one year, at higher-than-typical interest rates.
Real estate investors are eager to secure these higher-interest loans from private lenders because it has gotten more difficult to obtain financing for anyone with less than perfect credit. These are not predatory loans made to homeowners, they are short-term loans made to other investors and business owners who need temporary financing and can demonstrate an ability to pay.
Investing in carefully screened commercial mortgages and bridge loans can provide you with reliable monthly income with high single-digit and even low double-digit returns, with extremely low risk.
There are many benefits of bridge loan investing that make it worth serious consideration for anyone who needs income:

• Reliable: Monthly income payments often come directly from the company that sources the loans, not the borrower. In most cases, the company that sources and services the mortgages holds a secondary interest, which assures your best interests are represented.
• Secure: Assets are backed with real-world assets, often secured by first position deeds of trust. Loan-to-value never exceeds 65%, allowing for market fluctuations. Properties are valued and vetted by experienced professionals.
• Limited Risk: Although private investment mortgage funds can provide income for years, the underlying notes are held short-term (usually one year) to minimize risk in the event of a market downturn.
• Flexible: Bridge loan notes and funds can be held in a self-directed Roth IRA for tax-free income. Funds can usually be rolled over into new loans for continued cash flow.

The downsides to bridge loans are that there is quite a learning curve to finding and managing your own loans, and when working with other lenders, not all operate according to industry best practices that make protecting your principal a top priority. (We are choosy who we refer to!) 
Find out more about bridge loans 

Three More Ways to Invest Outside of the Stock Market 

1. Real Estate. Cash-flowing rental properties are a time-tested way to build wealth. Being a landlord can be time-intensive but rewarding. Some basics:

• Start small (perhaps renting out your old home when buying a new one);
• Crunch the numbers, always focusing on cash flow and not speculating on appreciation;
• Get good help and advice, from a real estate attorney to a great handyman; and
• Always have adequate cash for the unexpected. 

1. Peer Lending. Also called “peer to peer lending” or “P2P,” peer lending cuts out the middleman – the banks and credit card companies – and allows people to lend using online websites such as LendingClub.com  and Prosper.com 

For those who are just starting out, peer lending offers a way to start investing in a hands-on way, investing as little as $25 per loan. Returns are generally in the high single digits or low-double digits. See “Peer Lending: How Investors are Earning Double-Digit Returns… Helping Strangers!” for more information. 

1. High Cash Value Life Insurance. Life insurance is not an investment,” per say, but it is an excellent place to store cash while also providing more protection for a family. 

Whole life policies constructed for maximum cash value are particularly attractive when one or more of the following is true:

• You desire to build equity and liquidity in a long-term savings vehicle that can outpace inflation;
• You value the flexibility of being able to temporarily borrow against your savings for major expenses or investment opportunities;
• Increased life insurance protection is desired. Because death benefits are permanent and grow with time, families with term life insurance are wise to replace their term with permanent whole life policies as they are able.
• Multi-generational wealth is valued. (There are valuable benefits to insuring adult children and grandchildren as well as yourself.)

Kim Butler

Co-founder at The SUMMIT for Advisors

| Best-Selling Financial Author | Founder of Partners for Prosperity, Inc.