A Beginner’s Guide to Alternative Investments
What are Alternative Investments?
Anyone who has invested in stocks over the past 5 years will be all too aware that it is increasingly difficult to make returns in the traditional way. As the financial markets continue to deliver slim returns each year, investors that want to outpace inflation must look for alternative ways to secure for their future.
Advantages of real assets
Unlike financial assets, such as stocks, a ‘real’ asset has intrinsic value. Real assets have a number of advantages over financial assets:
- They provide a physical ‘home’ for your investment, meaning that if the market fails they will still retain their intrinsic value
- They are more ‘liquid’ than financial assets, meaning that it is often easier to dispose of them in a hurry, should you need to
- Finite resources, such as precious metals, are likely to continue to increase in value the longer you own them
Most importantly, research from DGC shows that real assets tend to outperform financial assets year on year. While FTSE 100 returned just 0.7% in the ten-year period ending in 2011, real assets stormed ahead (more on this below).
It should also be pointed out that real assets are not without their drawbacks. Unlike stocks, they are susceptible to loss, theft and damage, so remember to take out airtight insurance to protect your investment.
No doubt you will have noticed a wave of gold buying companies springing up over the past few years. This is no coincidence: the demand for gold means that recycling old jewellery is a way to make quick cash.
But before you go rooting through your jewellery box, wait: there are other, more lucrative ways to cash in on gold. The first and most obvious strategy is to invest directly in gold items, such as coins, and store them somewhere safe. Just as with stamps, rare and proof coins are highly collectible and can fetch an eye-opening price from the right buyer. Arguably more exciting than coins are solid gold bars, known as bullion, made famous on the big screen.
Another route into the gold market is via a trust fund, although the cost of entry can be very high – and you don’t get the ‘Treasure Island’ satisfaction of owning a personal stash of gold.
Between 2011 and 2011, based on the value of one troy ounce, gold returned an impressive 18.7%.
The next time you pour yourself a drink, take a moment to consider the investment potential of fine wine. Certain vintages perform consistently well year on year, and top bottles can sell for thousands of pounds. In fact, wine commodities have an index of their own, called the Liv-Ex Fine Wine Index.
The value of wine is a simple equation of supply and demand: a finite amount of a given wine is produced each year, an amount that gradually decreases over time as it is consumed; the less in circulation, the more valuable it becomes.
When investing in wine, choose red over white (keeping an eye on top-performing vintages) and store it ‘en primeur’ (in the cask). Some prefer to take half their investment to drink at home, and recoup the costs when they eventually sell the half in storage. That’s the beauty of fine wine: if all else fails, you can always drown your sorrows!
Between 2011-2011, the Liv-Ex Fine Wine 100 Index returned an appetising 11.7%.
Wine is not the only alcohol that becomes more valuable with age. Sometimes called the ‘alternative alternative’ investment (wine being the first alternative), the demand for whisky is soaring. In fact, whisky sales increased by over 34% between the first quarters of 2012 and 2013, a trend that is not predicted to slow down any time soon.
This is largely due to the fact that whisky is becoming an aspirational drink in emerging market economies, where people are able to afford it for the first time; in fact, one businessman was prepared to spend £135,000 for a bottle at an airport in Singapore – before drinking it on the spot.
The principles of investing in whisky are similar to fine wine: old and discontinued bottles are the most valuable and, unlike wine, will not perish in the bottle, meaning that they remain good to drink for many, many years.
However, it is especially important with whisky that you do your research or seek expert advice before investing, as the gap between the top and bottom performing bottles is enormous.
Stamp collecting is more than just a hobby; the oldest and most rare stamps can fetch in excess of $1 million at auction. Stamps can be purchased online, at auction, from dealers, firms or private collectors. Classic stamps in good condition are the most valuable, particularly from the Victorian and pre-1900 eras.
If you are jaded with the financial markets, alternative investments could be the way forward. Provided that you do your research, seek expert advice and – perhaps most importantly – only buy assets that you would be otherwise happy to hold on to – real assets can provide a rewarding and enjoyable investment strategy.
Nicola is a freelance financial writer working alongside alternative and agricultural investment firm DGC. She specialises in the investment aspect of finance and enjoys discovering new, often bizarre types of investment and sharing these with the world.