How to Build Wealth -- Without the Stock Market


It's 1968, and your grandmother just gave you a dollar for your tenth birthday.

You're a bit underwhelmed. The dollar doesn't seem like much. Yet it's the sum total of your net worth. So instead of buying a comic book or candy, you decide to do something unusual.

You invest that dollar. Being ten, of course, your market knowledge is scant to say the least. You decide to pick a company at random. You pick Altria, because it starts with the letter A and you've got limited patience for stock picking.

Guess what? You just struck gold. Fast-forward more than four decades, and your single dollar is now worth nearly $7,000.

That same dollar invested in the S&P 500 in 1968 wouldn't even be worth $100.

Such is the nature of the stock market. The prospect of a huge payout is always looming.

Yet not everyone wants to assume the risk it entails. After all, you might have invested thousands in Kodak ten or 12 years ago. Hey -- people love photos. It's a great legacy company.

Kodak was also totally unprepared for the digital revolution. They lost money year after year. Bankruptcy arrived in 2012. Company shares lost 99-percent of their value over a decade.

They can't all be winners, right?

Not everyone wants to separate winners from losers. Not everyone wants to trade profit potential for security.

With that in mind, let's look at some proven ways to build wealth outside the stock market.

Annuities -- a safe and sound approach

The idea behind an annuity is pleasingly simple. You pay an insurance firm with an upfront lump sum. In exchange, that insurance company agrees to provide you with a guaranteed term payment. It's kind of like winning the lottery -- except you have to award yourself the cash prize.

If you're looking for lifetime security, this is a strong option. Annuities provide guaranteed income. They make an excellent building block for financial planning purposes.

Yet they aren't without drawbacks. The returns aren't particularly enticing. Because they are usually linked to interest rates, they've been a marginal investment for the last few years. With the Federal Reserve strongly indicating a rate hike is in the works for 2015, that may soon change. As interest rates rise, annuities will become a more attractive option for stock market holdouts.

Real estate -- they're not making any more of it

Like annuities, real estate offers a smart way to guarantee lifetime income. With the housing market returning to baseline, this is another solid choice in lieu of stocks. While the returns can blow away annuities, there is a definite downside -- maintenance.

Not everyone is cut out for the life of a landlord. Maintaining property (and relations with your tenants) can be tricky. There is another option, however -- a real estate investment trust (REIT). If you'd like a decent dividend payout that doesn't require fixing a broken HVAC at 2 a.m., this could be the option for you.

Bonds -- the classic choice

Investors leery of stocks have always gravitated to bonds. The setup is simple. You lend money to a corporate entity or the government and draw interest in return. Bonds make a great hede against a struggling market. They also make a great, safe investment in their own right. The returns aren't typically overwhelming, however, so bonds are better used as one part of a multi-pronged investment strategy.

Gold - the king of hedges

In times of economic uncertainty, gold is king. It doesn't go bankrupt. It won't be devalued to the point of worthlessness -- and if that ever happens, we'll likely all have much bigger problems than our portfolios.

Gold is best employed as a hedge against losses in other asset classes. Though global demand for gold softened in the last year, its future prospects are rosy. The two largest worldwide buyers of gold are China and India -- two economies with massively-expanding middle classes.

Cultivating human capital

Imagine the house of your dreams. Perhaps it's beautifully understated. Perhaps it's a full-blown monument to opulence.

Either way, if the foundation isn''t solid, the home of your dreams is just a mirage. The same applies to your career. If you don't lay a proper foundation, you'll fail to maximize your talents and earning potential.

To put it bluntly, you are your most important investment. By pursuing more education and refining your skill set, you can become vastly more valuable on the open market.

Social capital is likewise critical. By building and cultivating social networks, you give yourself an immense competitive advantage.

By investing in yourself and leveraging your social connections, you can vastly expand your lifetime earning capacity.

And that's the best investment anyone can make.

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