Investing Off the Grid

Morningstar.com is kicking off Alternatives and Diversifiers Week March 19. During the week, we'll discuss how to diversify a portfolio across traditional financial assets, and we'll also explore perspectives about what role--if any--alternative asset classes such as commodities and long-short funds should play in investor portfolios.

To help kick things off, I asked Morningstar.com readers whether they had ventured into what I call "off the grid" investment types--nonpublic real estate, private equity investments, or collectibles, for example.

Readers shared a panoply of responses--citing everything from income-producing real estate to vintage posters--with a few noting that such investments form a sizable share of their portfolios. Others, meanwhile, said that they hadn't seen a need to venture beyond traditional financial assets such as stocks and bonds. To read the complete thread or share your own perspective on this topic, click here.

'Reduce My Involvement in Parasitic Financial Markets'
Cliff was among the readers with a sizable stake of assets outside of publicly traded stocks and bonds, writing, "My 'off-the-grid' investments are about equal, in terms of investment, with that of my traded securities. Some of that is in income-producing real estate and I also have investments in two private companies, one of which I manage. I also have a loan out to a start-up. The real estate is obviously for income. The private-company investments are for hoped-for long-term outsized appreciation. Not having a market valuation on a day-to-day basis has never bothered me."

Ditto for Jpluther, with about 40% of total assets in nontraditional investments. However, this poster defines "off the grid" differently--and literally. "The most obvious 'off-the-grid' investment, going straight to your question, was to put solar power on the house and an electric car that I can charge off the roof. The after-tax cost of those two was in the $45,000 range, and now I don't have electric or gasoline bills. I also made a loan to an organic farm that pays me in fruits and vegetables, as well as numerous asset secured loans to asset-rich, cash-poor businesses in my area who found bank loans extremely expensive for them. In addition, I purchased 25% of an apartment building in my area about a year and a half ago. I have been very pleased not only to have very acceptable returns, but to reduce my involvement in (what I see to be) parasitic financial markets."

Kittydog2 also sees a rich payoff in going off the grid, literally. "I'm moving off the grid (solar and wind investments for my home). Energy is only going up in cost. I'll bet the payback ratios on these investments are better then they look. It's not just about what you earn, it's also about what you don't spend. With no mortgage, no utility bill, growing a lot of my own food, and a yearly tax bill in the low three figures, I'm anticipating a monthly budget that the Unabomber would judge as a little on the low side."

'Try Raising the Rent on Your Parents . . . Impossible!'
Many other posters have ventured into private real estate for diversification, income, and appreciation.

LarryA has opted for a diversified basket of properties. "I have residential rental realty in two states, the two states in which I share time during retirement. I have timber and farm land in a third state. In addition to having heritage value, the diversification for income purposes has worked well over the last few years while interest rates have been so low. At this point in time, it provides opportunity for appreciation, although I could have sold a few years ago and come out better on this; now I wait. I mostly try to keep real estate out of my investment portfolio."

DGC667's real estate portfolio is also sizable and diversified: "I have about 30% of my portfolio in private real estate deals, apartments mostly, some strip malls, and office buildings, too."

Kayaker's real estate investment isn't large in the scheme of his total portfolio, but it has largely delivered on its original promise. He wrote, "We bought two investment 'units' in a limited partnership many years ago (about 1992) from a financial advisor we no longer use. It owns a low-income apartment in a medium size town. It has done what the advisor said it would--it threw off tax credits for years equal to what we invested and now we get a small check each year."

DanInAZ's real estate investment also contributes to his in-retirement income stream. "I have a 13% ownership in an office building. At the amount of the original investment it constitutes only about 8% of the total portfolio. Calculated at the fair market value of the building it constitutes about 25%. However, the income constitutes about 20% of my annual yield."

Bnorthrop's real estate investment has delivered, too. "I have one single-family house rental unit for income and price appreciation (yes, it has)."

Retired at 48 has found his rental property in Florida to be a satisfying income producer with tax benefits to boot, and it also served as his parents' home for many years. But he quipped that such a situation has "a major flaw: try increasing the rent on your parents . . . impossible!"

Yet, Kayaker also pointed out that owning real estate investments can come with headaches, even if one isn't in charge of renting out and maintaining a property. "I don't like the K-1s [a tax document that reports income from a partnership] as they increase the cost of getting my taxes done each year." Nor is Kayaker convinced that his real estate investment has appreciated since purchase. "I wish the general partner would have sold the property years ago when real estate was hot--now the 'shares' we hold are probably worth less than we paid for them, just like most peoples' houses. I would be reluctant to do something similar again given the lack of liquidity in such investments, but the original investment represents less than 1% of our total net worth so it would not be a big deal if we never got our original investment back."

Richendric, meanwhile, has made direct investments in master limited partnerships. "We have invested in three MLPs directly with a developer of natural gas and oil fracturing projects in Pennsylvania and Ohio. We have 10 investors in on one project and five each on the other two. All are family members or friends of my son and my niece." To date, the results have been mixed. "The natural gas project has returned very little positive cash flow so far. The wells are drilled, but pricing is way below what was expected. The first oil project has already returned about 15% pretax in its first year of operation."

DesertRat87's portfolio includes a mix of real estate and oil and gas interests that have been in his wife's family for years. "These are hard to value," he wrote, "but represent about 15% of the portfolio."

'A Secure Box of Gold Coins'
For other readers, coins beckoned as their go-to off-the-grid investments. Richardsok opined, "To my mind, there's nothing further off the grid than a secure box of gold coins quietly purchased bit by bit over the years and discreetly kept where only I and my adult daughter know where to find it."

DanInAZ concurred with the emergency/last resort thesis for coins but also noted that moderation is key. "As an absolute emergency fund I also keep some gold coins, but they constitute less than 0.5% of the total portfolio. It is, however, my intention to move that to 1.0% during the next eight to 12 months."

Silver has glittered brightly for YoungLion, especially because it was purchased when the metal was down in the dumps. "I've collected coins my entire life. In the late 1990s and early 2000s, silver prices were dropping to the point where my coin-collecting budget allowed me to buy a large number of silver coins. I never thought of my hobby as an 'off-the-grid' investment until recently. It just so happened to work out that way. In retrospect, it's as if my budget enforced a 'buy low' strategy. The downside is that to fully enjoy my collection now, it involves a trip to my bank box."

Yet RetiredInvestor believes that metals' prices can outstrip their intrinsic values. "I did own some precious metals but feel they are overvalued beyond their intrinsic values and have exited this market." ​

'I'm a Collector at Heart'
Users also discussed the merits of investing in fine wine. Breejay shared a success story: "In the 1970s and 1980s first-growth Bordeaux was, compared to now, reasonable in cost. On paydays back then I went to my favorite wine store and purchased bottles of Lafite, Mouton, Latour, Haut-Brion, and so on. As time went by I consumed many of these bottles but I also sold some through auctions. In 1997 I sold a case of 1989 Chateau Haut-Brion. tripling my original investment (initial investment made in 1992). A case of 1989 Haut-Brion will sell for approximately $15,000 at auction today. It cost around $1,100 in 1992. If you have lots of money, a place to store your wines and at least ten years to sit on your investment, I believe you can still make money on first growth Bordeaux today. Needless to say, you must do our homework."

GFR100 concurred that would-be wine collectors must know what they're doing. "I have around 2% of my portfolio in Bordeaux wine, I bought it through a broker in 2005. The wine is kept in their cellars at the right conditions, which is important at the time of selling, and they offer quite a comprehensive analysis on the different wines available, and normally offer a price at which they would buy it from you. So far it's been appreciating at an average of approx 12% per annum, but I really don't pay attention to that, I intend to keep the wine for 10 or 20 years more, not drink it, instead, when I sell it I will drink a really good bottle of wine from Mendoza [Argentina] with the proceeds.

RetiredInvestor, meanwhile, doesn't need to turn a profit for his wine to have been worth his while. "I own a bunch of wine but plan on drinking most of it before I pass from the earth."

Dancan has ventured in a broad swath of collectibles over time. He wrote, "I am a collector at heart from my early youth. I started with baseball cards, coins, stamps, marbles, and even bottle caps. It was for the enjoyment of it, not thinking at any of the collections as an investment. I still have the coins and added to them with U.S. and foreign currency as well as the baseball cards, mostly from the '60s. Both collections will be passed on to my grandchildren, in time. For the past 20 years I also collected autographs (Beatles, Thomas Edison, Babe Ruth, Robert Frost, Muhammad Ali, Elvis, Vince Lombardi--and the entire first Super Bowl Green Bay Packers--and others), although not lately. I have about 40 of them and I view most of them as investments (donated some of them to charity auctions), and when I have more free time, I will look to the market and sell them."

Richardsok, meanwhile, is an enthusiastic collector of fine-art posters. "Original vintage advertising posters are perhaps one of the few investments in fine art still accessible to upper-middle class--or even budget-minded collectors. My favorites for beauty and appreciation--and for covering one's living room walls--include turn-of-the century France and Belle Epoque Paris, also old World War I bond posters and bicycle advertisements. For a 'mere pennies budget,' some of the recent British rail travel posters are exceptionally nice and still very cheap. Also still inexpensive are Soviet Union propaganda posters. I feel both might appreciate well over the years."

RedMoo, too, expects a payoff from collectible items--in this case, jewelry and art--even though turning a profit wasn't the original intent. "Like most collectors, I started when I was young. I collected things I love, not thinking too much about future worth. I collected early 20th century silver jewelry before mid-century objects became popular. Likewise early 20th century American art, which has always (and still is for the most part) undervalued. The biggest bonus has been being able to enjoy looking or wearing these objects. I will definitely recoup money spent when I decide to sell someday."

Swoone has received a triple benefit from an investment in arts and crafts furniture: utility, enjoyment, and price appreciation. "I have always been a collector. I started to collect Arts and Crafts furniture, pottery, clocks, and artwork in the early 1970s. I basically furnished my home and paid very little for any of it. At the time I started to collect I knew very little about that time period. There weren't many reference books at that time on the Arts and Crafts period. I bought the items because they were aesthetically pleasing to me. Also the furniture is heavy and durable so you can live with it and don't have to treat it like museum pieces. As the years have gone by I have seen chairs and tables, etc. that I paid $20 for, reach into the thousands of dollars at current values. I've also seen items the same as what I own go into collections at prominent museums. I live with these things every day and would hate to part with them. But if I do need money as I get older I figure I can sell a piece or two a year and have a pretty good income."

Petrus1949 also expects that at least part of his collection--which includes sports cards, records, and coins--will appreciate and contribute to his retirement income. He wrote, "Making vast sums of money was not my intention when I started collecting, however the way things have turned out that is exactly what will probably happen. I can't say I'm unhappy about it!"

Bob2274's post nicely sums up the trade-offs involved in investing in collectibles. "I have a small automobile collection: eight cars, all vintage English. Depending upon make they pretty much reliably appreciate at about 5%-10% a year and one, in particular has increased by more than 2,000% since purchase, although I've had it a long time. But primarily, I own them because I enjoy driving them. The bulk of our investments are traditional stocks, bonds and funds. But I have to admit, a vintage Jaguar puts a bigger smile on my face than any stock I've ever owned, on the other hand you don't have to replace the water pump on a stock."

Dclemons' off-the-grid portfolio includes a number of aviation-related collectibles, but he notes that such "off-balance-sheet" investments can be difficult to value. "The problem is coming up with a value for collections. We also are building our physical gold and silver assets. We primarily invest for income and prefer liquid marketable securities."

'I Don't Go Off the Grid'
Yet as enthusiastic as some of these off-the-grid investors where, other posters noted that they've stuck with traditional assets.

Peter5 was one such reader, noting, "I've done well over the years with a well-diversified stock and bond portfolio so I find little need or desire to wander from what I enjoy and understand best. Probably should invest in real estate but I'm too lazy to find someone to manage the property, manage it myself, or deal with the taxes, etc. I sleep very well at night with just my 70/30 mix."

FidlStix likes to stick with his circle of competence when investing. "As a small potatoes, traditional investor, I don't go 'off the grid.' Most of these things are beyond my areas of competence. Those non-traditional areas I do know something about (vintage stringed instruments like guitars, banjos, and violins) are way too rich for my blood." He then shared a recipe for--you guessed it--small potatoes.

See More Articles by Christine Benz

		30-Minute Money Solutions
	Need help picking up the pieces in this turbulent market? 30-Minute Money Solutions by Morningstar director of personal finance Christine Benz simplifies the daunting task of getting your financial house in order. Written for novice and experienced investors alike, this book offers manageable, step-by-step solutions for tackling money challenges and building a comprehensive financial plan in simple 30-minute increments. Learn more.
	Get Your Copy Today--$16.95