Matthew Erskine is managing partner for Worcester law firm Erskine & Erskine. Reach him at (508) 753-7100.
Updated: April 26, 2021
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Alternatives to investing in the stock market
By Matthew Erskine
With the recent rollercoaster ride of the stock market, the idea of alternatives to the stock market for investment has resurfaced. During the course of almost 35 years of settling estates for a diverse group of clients, and seeing the results of their investments, I’ve seen first-hand the range of investment opportunities beyond publicly traded stocks.
Real estate. Over the long term, investing in a primary residence is a good investment because of the numerous income tax advantages from deduction of some of the interest in mortgages, to exemptions from capital gains when the property is sold. The main drawback of investing in a primary residence is, usually, they do not produce any income, and require money to pay for the operating costs, taxes and upkeep. Owning a rental property has similar advantages and produces a net income.
Debt. This can vary from a Certificate of Deposit, which is a loan to a bank, to loans to individuals and everything in between. The return on a debt investment varies directly with the perceived level of risk involved. A CD might have less than a 1% return, while a loan to an individual could have an 18%-20% return.
Tangible assets. Art, numismatics, collectibles, wine and Bitcoins are a few examples. The allure of tangible assets is driven by the news of spectacular returns on specific cases. However, investing in tangible assets has its own set of problems.
First, the market for tangible assets, even Bitcoin, is opaque, largely unregulated and varies widely by location. Second, more than most investments, emotions play a large role in the value people place in an asset. It becomes your work of art, and you develop a relationship with the piece that increases its perceived value. Third, this relationship can create conflict between the perceived value of a piece, as opposed to its actual market value.
Owning your own business. Potentially, the highest rates of return come from investing in your own business. Many startups have little costs or overhead to begin with and, you can, by selling your time and expertise, make something out of nothing. Startups have become easier to do with the acceleration of virtual offices and online services such as professional services, consulting, coaching and IT support. The downside is you are now your own boss with all that that entails. You have to do the work to make the returns you want, and you have to pay for all those things you never realized needed to be paid for, like bookkeeping. That said, many of the greatest fortunes in the world started as a result of someone investing in their own business.
The one commonality that these alternative investments share is that it requires hard work to achieve those returns. You cannot passively put money into these alternative investments and expect that you will make any money. From an estate planning point of view, my one word of advice is if you do invest in these alternatives, consider how you will sell an investment. It is tempting to put more money into a venture when things go bad, with the hope that just a bit more will turn it around. Similarly, it is tempting to keep investing in an asset long after the value of that asset has grown to the point where you can’t effectively manage it.
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