From Beanie Babies to Baubles: 5 Unconventional Investments

By Michael Kling on 17 December 2012 (Updated 7 March 2014) 0 comments
Photo: Aunt Owwee

If you're bored with stocks and bonds and seeking a taste of the exotic, you might be interested in unconventional investments.

Unconventional investments can help protect you against stock market volatility because they don't drop — and might even rise — when stocks sink. At least that's the theory, anyway. And if you're lucky or savvy, an alternative investment can produce an outsize return.

On the other hand, many unconventional investments are illiquid — you can't quickly sell them for quick cash. Many are risky and difficult for ordinary folks to understand. For that reason, it's best to allot only a small part of your savings to unconventional investments and to carefully analyze potential risks.

Here's six top unconventional investments. (See also: 7 Great Investments for First-Timers)

1. Collectibles

If you buy collectibles, you can invest in something you love and understand. But you might end up owning a lot of stuff and not really making money. Knowing how much someone will pay for a collectible several years from now is hard to predict. Consumers are fickle and fashions change. What's a hot collectible now may latter be just another yard sale item. Remember Cabbage Patch kids?

If you want to invest in collectibles, say wine, stamps, or baseball cards, buy only what you understand well — ideally what you're expert in. Try to be realistic about how much an item will sell for in the future.

The danger of collectibles is that they can be stolen, lost, or destroyed. You might consider insurance or a safe deposit box, but those costs diminish your profit. Owning artwork you hope to sell for a gain may end up costing money.

2. Jewelry

Some jewelry owners do make great profits reselling jewelry, but they're experts selling very high-quality gems. Most jewelry appreciates very little or nothing at all. Even though gold has increased greatly in years, you might not get as much as you hope when selling gold jewelry. Buyers take a sizeable cut, and the price is based on the jewelry's gold content, which may be lower than you expect. Most people, experts warn, should buy jewelry for its beauty and avoid it as an investment.

Some people argue that jewelry and collectibles are not real investments, as they don't make money for you while you own them — what's called an internal rate of return. A condo can generate rent. Stocks can generate dividends. But a diamond just sits there looking pretty until you sell it.

3. Precious Minerals

How about some uranium or palladium? You can invest in almost anything by owning a specialized exchange traded fund (ETF). Like mutual funds, ETFs are baskets of assets but can be traded throughout the day like stocks. Typically tracking an index, ETFs can hold anything from biotech firm stocks to utilities to currencies to bonds from small countries you can't pronounce. Some are even designed to increase in value when stock markets fall. They can track gold, silver, platinum, natural gas, oil, or uranium to name a few, as well as baskets of different precious metals.

While ETFs, which boast low costs and tax efficiency, have plenty of supporters, critics say they more like speculating than investing, have high trading costs, and don't offer diversification.

4. Frontier Investing

If you're fearless as Davy Crocket, you might consider investing in frontier markets — countries like Romania, Kenya, or Pakistan. Don't laugh. Not too long most people thought buying shares of companies in Brazil, Russia, India, and China was dangerous, but those who did garnered robust returns and now investing is those countries, the so-called BRICs, is considered quite normal. Countries like Columbia and Vietnam, often blessed with a growing middle class, may soon graduate from the frontier and into a group with catchy acronym.

Rather than traveling to Tanzania or Indonesia yourself, you can put money into a mutual fund or ETF specializing in frontier markets.

Real estate investment trusts, or REITs, own commercial properties like office buildings and shopping centers and pay dividends based on rents they collect. As their name indicates, non-exchange traded or non-traded REITs are not traded on stock markets. They are supposed to be more stable than publicly traded REITs because their values don't gyrate with the stock market, and they are not hurt by interest rate swings because rents they get are set for years.

However, financial regulators warn that their shares are illiquid and can't be easily traded. They are more difficult to value, and fees for selling can diminish your returns. Money you think you're getting as a distribution may actually be funds the REIT is borrowing or your principal being returned. Make sure you do your homework, and read its prospectus and its SEC filings to avoid being burned.

5. Peer-to-Peer Lending

In peer-to-peer, also called person-to-person or social lending, you lend money to other people through websites, such as Prosper or Lending Club. Instead of lending to a government by investing in bonds, you lend to other people by investing in online listings. You review their criteria like debt-to-income ratios and credit scores, pick loans to your liking, decide how much of the loan you'll fund, and then get part of the monthly payment after the online intermediary takes its portion. 

P2P networks say they provide investors better returns than typical fixed-income investments and less volatility than stocks. That depends if borrowers you pick repay their loans. 

Lending to strangers, some with imperfect credit histories, is certainly risky. Tips: Spread loans around to many different borrowers, start slowing by initially lending only to the highest-rated borrowers, and don't expect to P2P lending to be a main income source.

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