In the world of investing, financial securities make up the bulk of investment products.
The most common product is fixed income securities such as government and corporate bonds followed by public equities (i.e. company shares) that average retail investors are used to seeing.
A common strategy for growing wealth is to build a diversified portfolio of stocks and bonds. The rationale behind this is that when the economy is doing well stocks tend to do well, and when the economy is not doing so well bond returns perform better than stock returns.
Sounds perfect, right?
Interestingly, this strategy ignores the fact that there are periods in history where both the stock and bond markets perform badly in tandem. That brings me to introduce to you…
What Are Alternative Investments?
Comic books as an investment? Time to blow the dust off that old collection of yours!
Alternative investment is actually a term encompassing a wide array of investment products.
Examples of financial-type alternative investments such as private equity, hedge funds, venture capital and the very popular real estate investment trusts (REITS) would usually have someone else managing the investment for you.
Hard asset-type alternative investments include the well-known precious metals like gold and silver, real estate, farmland to more exotic items such as artwork, wine, comic books, and even LEGO sets! (Think twice before giggling at this because well-kept LEGO sets kept in their original boxes have earned respectable investment returns!)
Benefits Of Alternative Investments
The greatest benefit is diversification of risk away from stocks and bonds in the portfolio, by investing in products that do not have their returns strongly related to both stocks and bonds.
This does not mean you should now go out and buy all the LEGO sets you can! As with stock and bond allocation, the key is to allocate your wealth and investments in accordance with your investment return objectives and risk tolerance level.
Types Of Alternative Investments
Here is a brief introduction to the common types of alternative investments.
1) Precious Metals
“Money is gold, and nothing else” – J.P. Morgan in a testimony to Congress in 1912
Very popular with the older generation, only a few decades ago gold and silver were once recognized as the currency of the world.
While precious metals have been used as currency for centuries, the current system of fiat money (backed only by the public’s trust in the government’s ability to repay debts) has only been in force for a few decades.
Precious metals perform well in periods of financial and political turmoil as a form of portfolio insurance against reckless national and economic policies, for the simple fact that precious metals cannot be printed.
For example, physical gold tends to retain its value well over time. They are also nice to look at.
2) Real Estate
Remember to do lots of research before investing in real estate.
Purchasing real estate would usually involve taking on a bank loan secured by the property itself. This allows investors to own a property by leveraging (i.e. coming up with only a fraction of the full cost in cash).
When rental income on the real estate exceeds the loan repayments the owner enjoys positive passive income on the property.
Owners of real estate investments should be concerned about the risk of rising interest rates or decreasing rental income which could lead to a situation where the property is draining your income instead of increasing it.
3) Private Equity, Venture Capital And Hedge Funds
Got too much money laying around? Let me help you with that!
Usually considered by wealthy investors, these involve pledging your money into a fund managed by a professional fund manager who will seek investment opportunities according to the fund objective.
Investment returns depend greatly on the style of the fund as well as the skill of the fund manager.
However these funds come with hefty fees that eat away at investment returns. The general management fee is about 2% of the assets managed by the fund and there will usually be a 20% commission on the profits generated.
4) Exotic Collector Items
Who would have known Lego could outperform the stock market!
It was reported in the news recently that investing in certain Lego model sets would have comparable returns with the stock market over the past few years!
However before purchasing exotic investment products it is best to acquire some knowledge and insights into the products you are buying into.
For example if buying wine for investment be sure to know how to store the wine properly at the optimal conditions so it would fetch a better price at sale. The same goes for investors of artwork, comic books, collectible toys and yes even Lego sets (i.e. not opening the Lego set fetches a higher market price).
Of course, these are just the general categories of alternative investments available and this list is not meant to be exhaustive.