My Alternative Investing Performance Update

With the stock market on a tear the past few months, I thought I’d take a moment to break down the performance of my “alternative” investments.

What is an Alternative Investment?

What counts as an alternative these days? Pretty much anything outside the traditional realm of stocks, bonds, mutual funds, and ETFs.

For me, my alternative holdings include:

• Peer to peer loans through Prosper.com.
• An eREIT portfolio through Fundrise
• Real estate crowdfunding through PeerStreet
• Business lending through Kickfurther
• Business bonds through Worthy
• A “group buy” website through Onfolio
• My limited cryptocurrency speculation (can’t really call it investing)

For the sake of disclosure, I have affiliate or referral relationships with several of these platforms, but I haven’t fudged the numbers to make them look any more or less impressive.

And of course this is just a snapshot into my experience, not investing advice or a solicitation to invest.

Let’s dive in and see how things look.

Alternatives as Part of the Portfolio

I want to be upfront that my over-arching investment strategy is one of low-cost index funds and dividend growth investing. Everything on this page represents less than 10% of our overall portfolio.

Overall, we’ve got a pretty conservative profile at this point, with roughly 33% of net worth between cash, bonds, and gold. I understand that costs us long-term growth, but affords less volatility.

We’re reasonably confident in having already reached our “FI number,” so I chalk up everything on this page as an experiment rather than something we’re relying on for retirement.

Pro Tip: Use a free tool like Personal Capital to pull all your accounts into one dashboard.

Prosper.com Peer-to-Peer Lending

This is where my experiments with alternative investments started way back in 2011, and I’m sad to report the last few years have been rough for my Prosper portfolio.

With Prosper, you buy fractional ownership in dozens or hundreds of personal loans, often for things like home remodels, weddings, or debt consolidation.

My goal is passive cash flow and my portfolio of (admittedly very risky) notes lost money in 2018 and 2019.

Compared to 2013-2015, where the account spun off at least $200 a month and earned 8-10%, this is bad news and has led to me actively drawing down my account. (From a peak value of around $20,000, only about $1000 is left in the account.)

Here’s what my current allocation looks like and the historical performance by loan grade:

(The lower the letter grade, the riskier the loan.)

Now in fairness, it seems like the worst of the bleeding is over. Over the last 12 months, I have seen positive returns, in the 5-7% range.

Pros of Prosper

• Over 9 years, my account is still profitable (7.14% annualized, according to their calculation).
• It’s open to non-accredited investors.
• You can invest as little as $25 a loan.
• You can build a diversified portfolio with theoretically much lower risk than mine.

Cons of Prosper

• There’s no collateral to these notes.
• Your money is tied up for 3-5 years.
• Weak performance (at least for me) over the last 36 months.
• A crappy user interface.

Fundrise eREITS

I started investing in Fundrise in 2015, and have slowly ramped up my investment since then as I’ve been happy with the cash flow performance.

Fundrise specializes in “eREITs” — online only, direct-to-consumer real estate investment trusts. It allows you to buy into a semi-diversified bundle of commercial real estate projects. They do through both equity and debt positions.

(I say “semi-diversified” because I’m usually talking about tens of projects and not hundreds or thousands.)

My primary goals with Fundrise were to build a passive cash flow stream and increase the percentage of real estate in my portfolio.

Since 2015, my Fundrise holdings have returned 9.3%. For 2020 year-to-date, that figure is 4%. (Probably doesn’t need to be said, but past performance does not guarantee future results.)

Pros of Fundrise

• Just a $500 minimum to get started.
• Open to non-accredited investors.
• Strong track record of paying dividends every quarter.

Cons of Fundrise

• Not as diversified as a broader REIT like Vanguard’s VNQ for example, which I also own.
• Limited liquidity — slower to cash out your principal.
• Yield seems to be slipping as the platform grows.

PeerStreet Real Estate Crowdfunding

On PeerStreet, you’re playing the role of private lender, mostly for short-term real estate rehab projects. These projects have a 25%+ equity cushion to protect investors from a downturn or other unforeseen hiccups.

As of February 2020, the company had facilitated over 8800 loans totaling more than $500,000,000.

Loans typically yield 6-10%, and I’ve been targeting deals using the Auto-Invest tool that have at least an 7% return.

Since 2017 when I started with PeerStreet, my loans have earned an annualized 6.7% return.

As of mid-2020, the loan selection has all but disappeared as the platform has hunkered down due to Covid-19. I’m grateful for the conservative approach, but that’s led to more cash sitting idle in the account.

Relative to Prosper, the PeerStreet platform offers similar returns, shorter loan terms, and the debt has the property as collateral — but you do need to be an accredited investor and be able to stomach a $1000 minimum per loan.

Pros of PeerStreet

• Shorter loan terms, typically 9-24 months.
• Backed by real property.
• Limited loan availability right now.

Cons of PeerStreet

• Open to accredited investors only.
• $1000 minimum per loan.

Kickfurther Business Lending

Kickfurther is an interesting platform where you can help growing small businesses by lending them money on their next inventory order.

The company calls these “co-ops” and they pay anywhere from 5-12% profit margin back to investors with projected payoff timelines of 2-8 months (as high as 25% annualized).

But my experiment with Kickfurther has been a money-loser so far. Starting in 2016, I bought into 8 different co-ops with 9-15% profit margins and only half have been paid off so far. The others have all made some re-payments but in some cases are over 12 months late in paying back the full loan amount.

(Kickfurther has since changed some of their underwriting rules to theoretically reduce investor risk.)

Thankfully I didn’t dump a ton of cash into this, but I’m definitely still in the red about $210 — or roughly 10%.

The other frustrating thing about Kickfurther is they charge you a 1.5% withdrawal fee to get your cash off the platform. No other platform I’ve tested has that insult-to-injury fee tacked on.

I probably won’t be back. For me, Worthy (below) is a better option right now.

Pros of Kickfurther

• Help small businesses.
• Low minimums and attractive interest rates.
• Open to non-accredited investors.

Cons of Kickfurther

• Poor loan performance, at least in my case.
• Confusing user dashboard; annoying withdrawal fee.
• Limited availability of co-ops makes it hard to diversify.

Worthy Bonds

Since meeting with the leadership of Worthy Bonds at FinCon a couple years ago, I’ve built up a modest position.

Worthy pays you a fixed 5% return on small business bonds, priced at $10 each. Meanwhile, they take your cash and go lend it out to businesses at a higher rate, profiting on the difference.

(My understanding is these loans primarily go to established businesses to buy inventory.)

I like this platform for its simplicity, (optional) automatic interest reinvesting, and seamless, fee-free withdraws.

So far, I’ve earned over $600 in interest.

When Covid struck, I actually reduced my Worthy position by about 40%, for fear of small businesses being unable to pay their debt. So far, those fears have been unfounded as Worthy has continued to pay the 5% like clockwork.

Since yields elsewhere have taken a hit, I’ll be adding a bit more to this account.

Pros of Worthy

• Fixed 5% return.
• Support small businesses.
• Can withdraw fee-free at any time.
• Investing starts at just $10.

Cons of Worthy

• Not FDIC insured. (but nothing on this page is!)
• Could face cash-flow issues if business borrowers default.

Onfolio

Last year I participated in a website “group buy” through a service called Onfolio. Run by Dom Wells, Onfolio specializes in buying, improving, and managing online businesses.

The buy-in was $10,000, which bought me a fractional stake in a money-making website. Dom sends out quarterly reports on the performance of the site, and recently paid out the first dividend distribution.

The goal is quarterly cash flow (paid from the site’s advertising, affiliate, and product sales income), and asset appreciation. When the site eventually sells, investors will be paid out a portion of the gain over the initial purchase price.

I understand websites can be a great investment vehicle, and this was an interesting way to get involved without having to manage anything myself. And I also understand an algorithm update can wipe it off the map — it’s a risky proposition!

Pros of Website Investing

• Strong returns.
• Possible to influence performance through optimization.
• Expanded buying power by pooling resources through group buys.

Cons of Website Investing

• High risk asset class.
• Somewhat expensive to get started.
• Requires ongoing maintenance, either by you or a management service.
• A somewhat illiquid asset; can take some time to sell.

Cryptocurrency

Of course the hottest “alternative” investments (if you could call it that) of the last 5 years has been cryptocurrency.

Depending who you talk to, Bitcoin and other alt coins are either the future of money or a giant scam. I think the real answer is probably somewhere in between, and dipped my toe into the digital currency waters in 2017

Sometimes it’s better to be lucky than good, and I think that was the case with my Bitcoin buy. As it climbed, I slowly sold off the gains until I’d made back my initial $500 “investment” and then some.

Since then, I’d mostly been letting it ride with the house’s money until adding another few hundred dollars earlier this year. I did this as an inflation hedge, and BTC has done well this year.

(I’m now the proud owner of a tenth of a Bitcoin!)

But as I mentioned above, my primary investing goal is to build passive cash flow, and unless crypto continues to appreciate it doesn’t check that box for me.

All in all, I recognize this is pretty silly. BTC could 10x or it could go to zero and it wouldn’t really be a lifestyle changer. But at the moment, I’m not comfortable betting the farm on the future of Bitcoin to make it a huge win.

Pros of Cryptocurrency

• Futuristic, potentially disruptive tech.
• The idea of a borderless global currency is cool to me.
• Possible hedge against relentless quantitative easing.

Cons of Cryptocurrency

• Extremely volatile.
• You’re responsible for your own security (hardware wallets), which some see as a good thing.

Other Investments

My other investments probably aren’t as interesting, but what I’m most into these days is building a portfolio of dividend paying assets.

To me, that’s an exciting way to get paid over and over again from work I do once, and buying for cash flow has helped me get over my fear of buying at the peak of the market.

(Zoomed out over 100 years, it’s always the peak.)

But given the run up of certain tech stocks, I could have done much better just betting it all on Elon or Bezos!

Your Turn

What do you think? Have you tried any of these platforms?

Or do you just VTSAX and chill?

Another other alternative investments that are performing well for you lately?

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