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STEPPING INTO the HumbleDollar confessional, I admit to dabbling in a few high-fee, low-liquidity investments. It goes against much of what I stand for. But on occasion, I, too, reach for yield and the promise of returns uncorrelated with stocks. Before the chastising begins, please know that these speculative stakes total less than 3% of my portfolio. The rest is invested mainly in funds with expense ratios under 0.15%—and some have zero costs. I also have ample emergency money.
Still, I’m intrigued by the new investment products made possible by advances in financial technology. In fact, my first foray into this space was about a decade ago, when I invested in peer-to-peer lending notes. How has that turned out? Not bad. I’ve averaged a 7% annual return after fees through a Roth IRA at LendingClub. Yes, I recognize I’d have done better with an inexpensive global stock fund. But my 7% compound annual growth rate beat U.S. high-yield bonds over the past 10 years, which is arguably a fairer comparison.
Maybe you’ve heard about the latest alternative investments that are just a few computer clicks away. They promise high returns in an investing world of rich stock market valuations and minuscule bond yields. Here are four I’ve researched—three of which I’ve invested in:
Masterworks. This site allows retail investors to purchase fractional ownership of individual paintings by renowned artists. Art is a $1.7 trillion market that has outperformed the S&P 500 since 1995, or so says the Masterworks website. (For context, the global stock market is about $106 trillion, while the bond market is $124 trillion.) Masterworks’s fees are comparable to a hedge fund, with a 1.5% annual management charge, plus 20% of future profits. There’s a soft $10,000 minimum price per piece of art, but I was able to invest less than that after speaking with a rep.
Vinovest. It’s estimated that the global wine market is worth roughly $450 billion. Vinovest’s site allows everyday investors to link their bank account and then put cash to work in bottles of fine wine. I let the professionals at the site pick my bottles. Like Masterworks, the site shows wine prices beating U.S. stocks over the past 20 years, with performance uncorrelated with stock returns. The annual management fee of 2.25% to 2.85% covers storage and insurance costs for the physical bottles of wine. There’s a $1,000 investment minimum and only a taxable (non-IRA) account type is offered. Keep in mind that the tax rules that apply to collectibles are different from those for stocks.
Fundrise. This is my third off-the-wall investment. It’s a crowdfunding platform that lets everyday investors tap into real estate deals. You might scoff at this one and suggest I simply put my money in an inexpensive real estate investment trust (REIT) fund. But Fundrise gives me access to private real estate deals that are typically only available to wealthier individuals. Fees total 1% per year and an IRA option is available. There are three types of managed accounts you can choose from, all with modest minimums. I went big and chose the high-growth option. For context, I’m a renter, so I arguably need real estate exposure. I’m also exposed to real estate through Vanguard REIT ETF and various stock mutual funds.
Edly. Heard of income share agreements (ISAs)? That’s what Edly offers. You can invest in students and earn a share of their future income. I tried to open and fund an account, but never heard back from the company on some due diligence questions I had, which is either a red flag or a sign of bad customer service. Edly has a $10,000 minimum and, to me, fees that are more complex than necessary. There’s a 1% annual charge for the first two years, plus a 4% fee on ISA cash flows. In addition, there’s a squishy catch-all fee of up to 1% on cash returned to investors. Still, I’m intrigued by ISAs and plan to investigate them further.
The above four investment platforms are among dozens of similar alternative investment websites. Touted potential returns are generally in the 8% to 12% range, after fees. Of course, taxes will take a bite out of that, plus self-directed IRA fees will reduce a retirement account’s net return. My expectations are lower—similar to the 7% I earned at LendingClub. At a minimum, with my three stakes, I’m fairly confident I’ll beat the 0.5% on my high-yield savings account.
That said, these speculative investments aren’t for the faint of heart or those looking for a quick buck. Patience is needed. I have enough cash on hand and income coming in, so tying up a small piece of my portfolio for five to 10 years with the goal of capturing an illiquidity premium is okay by me. On my personal balance sheet, I carry these positions at cost and update their value just once a year.
My suggestion: Only consider these sorts of illiquid, high-fee alternative investments if you’ve already built a low-cost portfolio of stock and bond funds. Don’t lock up cash you may need in the near future. Check all those boxes? Consider these investments part of your play money—and have some fun.
Mike Zaccardi is a freelance writer for financial advisors and investment firms. He’s a CFA® charterholder and Chartered Market Technician®, and has passed the coursework for the Certified Financial Planner program. Mike is also a finance instructor at the University of North Florida. Follow him on Twitter @MikeZaccardi, connect with him via LinkedIn, email him at MikeCZaccardi@gmail.com and check out his earlier articles.
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I think Masterworks would be more interesting if you invested in a pool that all the art purchases came from. That way you’d be essentially buying a limited but diversified Index fund of Art. I would never pretend that I could pick a winning art piece, and so much value depends on public opinion in that space.
Vinovest and Fundrise (I’ve poked around the latter) both seem like they could be interesting, but frankly I’d prefer to hit FI before I play with them too much. Since Vinovest has a natural reason for increased scarcity (consumption!) and Fundrise has productive assets, both of these seem like reasonable experiments to me.
As for ISAs, I’m not clear on exactly how that works, I’d just say that like Masterworks, it seems risky to put it all on one person. If you can spread your investment across hundreds, or thousands of students, that might pique my interest.
That was my big concern with Masterworks. They let me buy four pieces with my investment minimum. Not much diversification, but we’ll see how it goes.
Mike
do you ever get to drink any of your investment in Vinovest? Now that might entice me.
They do! I’m not a drinker, but it might be fun to break out one at a family gathering–it’ll make for fun conversation at the very least!
BTW – thanks for a really interesting article – plan to look harder at a few of these. I usually don’t pull the trigger but I like to know what is out there.
While there is much to recommend in these alternative investments, one underappreciated disadvantage is the complexity involved in creating yet another account on another platform for this purpose. Your heirs may not be particularly pleased with handling a $5K account at Masterworks.
I have a Fundrise account due to the unique advantages of private real estate access, but shy away from the others because I do try to keep my financial portfolio fairly simple and straightforward.
Probably right. Lord willing, I’ll have 50+ years to make it easy for them. I’ll be sure to liquidate it during my golden years decades down the line.