What is an investment?
When you think about investing, what do you think about? Shares? Bonds? Property? Cash, perhaps? In other words, the traditional investment assets: these are the investments that most would consider, and then probably stop. But there are other assets into which you could invest, many of which you might not consider as investments.
Anything that falls outside of the list of traditional assets would be termed an alternative asset, and these could include tangible assets such as coins and stamps, as well as the intangible assets such as futures and options, private equity funds, and commodity derivatives.
Investing in alternative investments: the right choice?
Just as a writer is told to write what he knows, an investor will always produce better returns from investing in what he knows. This usually involves undertaking a large amount of research to bring you up to speed on a company’s products, approach to market, and a calculation of fair value. Maybe it involves relying on the expert opinion of others.
But let’s not forget that you may have built up your own wealth of expertise, over a long period of time, without even knowing it. If you have ever been faced with the phrase ‘I want to pick your brains’, then you’ll understand that others see you as an authority in an area where their knowledge is lacking.
Invest your passion
The knowledge that you will have acquired during the time you that have pursued your passion, hobby, or pastime, will be immense: let’s not beat about the bush, you know your stuff. You get asked to impart advice, and give it gladly and freely. You already invest in your hobby, but usually by way of time. Why not invest some of your hard earned cash, too?
Coin collectors build their collections because of an interest in an historical period, or particular style of coin, maybe. Such collections end up as investments, in the same way that stamp collectors, comic book readers, modern art buyers, and the like, will also build up collections of value.
Some people are avid car enthusiasts, while others can’t resist toys that take them back to their childhood, and still more adorn shelves with antique china. They do this because they love these items: collecting is a hobby. Often these hobbies turn into investments without the realization of them doing so.
Perhaps you like a glass of wine in the evening. Have you ever considered being instructed in wine tasting, and then turning this passion into a penchant for fine wine investing?
Memorabilia – sports, celebrity, politics, etc. – can gives hours of fun, you’ll always have an item for discussion at a party or social gathering, and prove a worthwhile investment.
Alternative investments – keeping them ‘real’
If you’re not convinced that toys and old plates are investments, and believe the only value in a wine is as an accompaniment to dinner, then you’ll be looking for ‘real’ investments.
That’s where assets such as gold and silver come into thinking. But ‘real’ alternative investments don’t begin and end with precious metals. Think also of other commodities, such as wheat, oil, and orange juice. Perhaps not realistic for the retail investor – where do you store 20 barrels of oil? – but other investments such as forestry land, solar panels, and wind turbines can be included in a list that gives real opportunity for alternative investing.
Moving on from physical investments brings us to the world of more complex financial instruments. Shares are relatively easy to understand: if a company is doing well, its shares will increase in value and it may pay bout higher dividends. Other ‘paper’ investments work in different, more complicated, ways.
Hedge funds might use financial instruments such as futures and options to profit from falling markets as well as bull markets. Other managed funds use their investors’ cash to invest in new, privately held start-up companies.
Hedge funds, venture capitalist companies, and private equity managed funds are all types of alternative investment opportunities becoming more widely available to the retail investor.
The good and the bad of alternative investments
The values of alternative investments often move counter to traditional investment markets. When the stock market is falling, it may be that the price of fine wine is rising.
Alternative investments can also be used to generate an income unavailable from other investments. Classic cars can be hired out for weddings, paintings can be loaned to art galleries, and land can be leased for farming.
Large capital gains are also possible. Coins and stamps have a large following worldwide, and artwork, fine wine, and property can all be bought and sold privately or at specialist auctions.
But, of course, as with all investments, there is a downside risk to putting money into alternative investments. Values can suffer because of illiquidity: lower demand means lower prices. Costs of buying and selling might be far higher than for traditional investments (many auction house charge commissions of 190% and more, for example).
Pricing of alternative assets can also be difficult. If a similar coin hasn’t been to auction for several years, what is the basis of valuation?
For these reasons, alternative investments are considered to carry more risk that, say, stocks and shares investment. But with the greater risk, so comes greater potential profit. Conducting full and proper research helps to minimize such investment risk, in exactly the same way as it does when investing in traditional assets. Investing in assets, in which you have a deep seated knowledge, perhaps because of a lifelong hobby, decreases investment risk even further.
If you haven’t got the time to commit to research and discovery, then there are specialist alternative investment funds that will manage your investment money for you.
The Final Word
Diversification is often quoted as being a key to long term investment gain. Diversifying into alternative investments, perhaps using some of your investment fund to purchase property related to a long term pastime or hobby, could be a fun way to ensure not all your eggs are in one basket. Or you could put your trust in one of the funds that specialize in alternative investments.
There are plenty of alternatives from which to choose!