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5 Ways To Build Wealth Without Touching The Stock Market

The wealth management and financial planning process in America is broken. That's not an uplifting opener, I know. But you have to name an issue plainly before you can make it better. The good news is that there are alternatives available - if you use the right strategies.

First, let's take a look at the problems. Most consumer investors have limited options for wealth creation. Most involve stock market investing, usually through an employer-backed 401(k), mutual funds or an ETF/index fund portfolio, bonds, or a stock portfolio.

Unfortunately, these and other popular products are tied to the market's performance. Investments go up when the stock market goes up and vice versa, and you need a strong stomach to survive the swings. Even if you play it relatively safe and keep your cash savings in CDs or money market accounts, you're earning less than 1 percent interest, which is less than inflation. That's no strategy for wealth creation.

Fresh Alternatives to the Stock Market

My father-in-law lives in India, but he takes a keen interest in my U.S. investment portfolio. He was shocked when I explained to him that my wife and I have few options other than investing in the stock market. In India, the government created several new products with 4 to 10 percent yields in response to high interest rates. That strategy enables people to diversify their investments and protect themselves against downturns in the market. Here in the U.S., we live in fear of the next bear market.

Consumer investors nervously wait out tragedies, such as the Great Recession, watching as their portfolios decline by up to 40 percent while they pray for a resurgence. The average retail investor saw a 2.1 percent return between 1992 and 2011 - not exactly an inspiring number. Investors then become wary about their stock market investments, selling when markets are tumbling and choosing to keep their money in standard savings and checking accounts. All too often, they then end up destabilizing their financial futures.

Fortunately, there are alternatives. If you want to begin creating wealth or simply become less dependent on stock-based investments, consider the following strategies:

1. Rental properties and vacation homes: The drop in homeownership rates has led to a rental boom, so purchasing a second property can be a great way to boost your finances. Rental investments can generate roughly 4 to 10 percent returns, plus any rise in equity; however, it can be difficult to be a passive landlord. If you don't want to manage tenants and handle maintenance yourself, you'll need to hire a trustworthy property manager. If you want to build equity, you also must purchase property in a market that has strong interest in rentals and vacation homes. While many online portals will give you a feel for the market, you will need to build your own payback/investment model.

Setup: Hard

Time commitment: High

Money required: Medium ($20,000 to $100,000)

How: Self-research

2. Commercial property: The approach is similar to that of rental properties, but in this case, you're buying into a one- or two-star hotel (think Days Inn [WYN] or Holiday Inn [IHG]) or a strip mall. The initial investment is significant, and you need to vet potential partners to ensure they're reliable and have domain expertise. But if you're willing to put in the initial time and capital, you can expect a 6 to 12 percent return, compared to a 1 to 4 percent return on a single-family home. LoopNet (NASDAQ:LOOP) is a great source to get started on research.

Setup: Hard

Time commitment: Medium

Money required: High ($250,000+)

How: Self-research

3. Franchise play: Invest in a single franchise or a group of successful chains, such as Subway or Dunkin' Donuts (NASDAQ:DNKN). The franchise industry is set to grow by 1.7 percent this year, generating up to $552 billion. That trend will likely hold, as franchising has grown every year since 2010. A franchise investment could earn you a 10 to 15 percent return on your investment. The biggest drawback is that buying just one or two will not generate enough income to make it interesting. You'll need to purchase several for the investment to be worthwhile, which usually means a larger check size and additional time spent finding the right partner. To get started, you could attend a franchising trade show to get the lay of the land.

Setup: Hard

Time commitment: Medium to high (if you run it yourself)

Money required: High ($50,000 to $1 million)

How: Self-research

4. Peer-to-peer lending, social lending, and crowdfunding: These platforms enable borrowers to connect with a wide range of potential lenders (that's you!) instead of having to rely on traditional banks for financing. The borrowers are individual consumers or small businesses, and the investments usually target an 8 to 12 percent return. Even by conservative estimates, the industry could be worth $150 billion by 2025. Most platforms focus on consumer lending and SMB lending, and you need to be aware of credit cycles and changes in interest rates.

Setup: Easy

Time commitment: Short

Money required: Low ($5,000+)

How: Online platform

5. Alternative lending: Investing in specialty finance products such as real estate, commercial loans, legal settlements, and payables and receivables loans can yield 8 to 20 percent returns, and it requires less time and energy than buying and managing physical investments. In the past, alternative investments were generally exclusive to investors with ultra-high net worth and large investment banks. Today, they're increasingly available to retail investors.

Setup: Easy

Time commitment: Short

Money required: Low ($5,000+)

How: Online platform

Most of us are already exposed to and invested in the stock market. In fact, those may be your only investments. But in the age of stock market volatility, don't let frustrations with low yield and a perceived lack of options get in the way of your future financial security.

Diverse, lucrative investment options exist outside of the stock market - if you're willing to understand and go after them. To understand them, you'll need to do your homework and weigh the pros and cons before you jump in. Everything takes time. However, inaction is not an option. Wealth creation isn't something you'll get to someday; it should be your top priority today.