Many investors have never been exposed to the incredible opportunities presented by the world of alternative investments.
Until fairly recently these opportunities were only available to large institutional investors, including endowments and pension funds, while the world of venture capital is generally completely closed off to the common investor.
The proliferation of tech-driven investment opportunities, the general distrust of the traditional financial market in the wake of the last financial crisis and a global drive to find different ways of driving profits while democratizing finance and investment all mean that 2019 is a great time for anyone looking into making profitable investments to seriously consider the alternative market.
What are alternative investments?
Before we get into the details on the benefits of these non-traditional investments, it is important to understand how investments are classified. Traditionally, investments have been grouped into asset classes, which are groups of assets that share similar risk and return characteristics. They also tend to react in a near uniform way to market events and pressures.
At its heart, an alternative investment is something that behaves entirely differently from the traditional classes of bonds, stocks or currency.
While there are myriad smaller options and niche opportunities, for the purpose of this article we will look at the main ones which tend to be hedge funds, private equity, venture capital, REITs, trusts deeds, objects (coins, wine, stamps) and P2P lending investment.
Until quite recently, alternative investments were almost solely reserved for high net-worth individuals. This was due to the fact that many of these opportunities have high minimum investments and fee structures compared to mutual funds and exchange-traded funds (ETFs), which are generally accessible through traditional financial institutions. As an example, the trade in rare coins is seen as an alternative investment but has a high barrier to entry. One requires specialist knowledge as well as fairly deep pockets to enter this asset class. In addition, it offers relatively low liquidity, as selling a collection of rare coins is much more specialized and market dependent than selling a chunk of stock in Google or Apple.
The good news for keen investors is that the democratization of investment brought on by technology has reached the alternative arena as well, meaning you no longer need to be a millionaire to make non-traditional investments although, if you play your cards right, you may become one sooner than you thought was possible.
Here are four reasons you should be looking beyond the traditional asset classes to make your money grow.
1) Alternative Investments Help Diversify Your Portfolio
It is almost impossible to overstate the importance of diversification when it comes to investment. During the financial crisis at the end of the ’00s, the media was rife with tales of people who saw their entire life savings, retirement funds, and investment portfolios wiped out in one fell swoop. Almost invariably they had entrusted their financial life to just one institution and paid a very high price. What this taught us is that conventional investments do not offer enough diversity.
Going alternative and investing in several different sectors that would react differently to major financial events is of vital importance. A stock market crash may wipe out stocks and bonds, but it tends to have little long-term effect on property values, especially in established areas. This is of course provided you are not going into debt to invest in said property.
By ensuring that your portfolio contains a variety of asset classes with little correlation to each other you will massively improve your chances of remaining profitable when investment markets start to decline.
Contrary to what banks and mainstream investment firms would have you believe, traditional assets are the most volatile during a large-scale financial crisis.
2) Geographic And Asset Class Flexibility
Alternative investments give you access to the best and most attractive investment opportunities anywhere in the world, regardless of your own location. By going alternative you can explore high-growth markets wherever they are, whether in a neighboring country or halfway across the globe.
This ability to take advantage of opportunities wherever they arise is now open to even the armchair investor, all from the comfort of their own home. Through P2P networks and crowdsourced funding drives you can invest in an Estonian tech start-up, a Lithuanian property development, a Kenyan farmers’ collective and a South African security business all in one day and without leaving your living room.
This sort of diversity ties in to point one above, in that it helps increase the security of your portfolio and safeguards against regional financial crises like the one recently witnessed in Greece.
3) Gain More Control
When you decide to invest a monthly sum of money into a mutual fund you are trusting the fund managers and financial institution to control your financial destiny. Your money forms a small part of a large pool and you are consequently a small fish in a very large pond.
Not only will you be just a number, but you’ll also be charged fees, early exit penalties and may even face long waiting periods to access your own money. Then, of course, there is the danger of the entire fund failing, something that has happened frequently in the past for reasons ranging from managerial incompetence to poor decision-making.
If we look at the P2P investment market, there is a general trend to waive all fees for investors, at least from reputable organizations. The fact that these markets are heavily tech-driven also mean that you can be as involved in the granular decisions as you want to be, and no longer need a degree in finance to become a successful investor. A new ear of user-friendly investment opportunities with low barriers to entry means you can easily take control of your own financial destiny.
4) Better Returns
We’ve left the best for last.
Alternative investments are generally more profitable than their traditional counterparts and can also generate better returns over a shorter period.
Due to a general willingness to accept more risks than banks, lower operational costs and smarter ways of using tech, many of these newer opportunities manage to outperform their traditional counterparts quite significantly.
Choosing smartly and making sure you invest your money in a trusted platform with good security should see you reap great rewards for being adventurous and going alternative.
How to invest money?
If you haven’t figured this out by now, let me share one of the most important things everybody should know before they start investing:
The world is full of people who would sell you toe nail clippings and magic cat dung...if they could get away with it.
Unfortunately, the financial service industry breeds more of those opportunists than any other sales field. And they can skillfully disguise feline faeces to look (and smell) sweeter than a bouquet of spring flowers.
As a young investor, you can’t afford to put some of these products on your dinner plate — not if you eventually want to grow wealthy.
What should you invest your money in?
For starters, if you’re going to invest, buy assets that appreciate over time. Cars lose their value each year, so it’s best to spend small amounts on depreciating assets (like cars) and more on assets that increase in value. I’ve seen the advertisements for Forex trading, especially targeting young people with grand promises. But remember this: for every dollar that’s made, there’s a dollar that’s lost. Always.
Unlike stocks, shares, bonds and real estate, currencies (except cryptocurrencies) don’t rise in value. When you trade a currency, there’s another person on the other end of that trade. Do you really want to gamble with them?
The only sure winner is the investment bank that makes money on the commission spreads from the sale and purchase. These products are pushed for that reason. They create excitement (usually for the naïve) and reap tremendous benefits for the large brokerages doing the transactions.
Investors are better off buying assets that appreciate over time — rather than wasting time and money trading currencies. If two people trade a currency (forex) back and forth for twenty years, the winner will win by an equal proportion to the amount lost by the loser. The odds are, also, that the winner wouldn’t win by much, if they each played the game for twenty years.
If you and I traded a stock market tracking fund or a London flat back and forth for twenty years, we would both benefit from the rising value of the stock market (plus dividends) or the rising value of the flat. We’d likely be better off holding those assets, rather than trading them, but my point is this: the overall stock and bond markets increase in value over time, as do real estate prices.
Forex trading doesn’t offer that. It gives low odds of success (like a night at Blackpool) and you won’t find Warren Buffett, nor a college endowment fund manager, nor an economic Nobel prize winner suggesting Forex trading as a sensible investment method. It makes money for the house, but not for the players, as an aggregate.
What would Warren Buffett suggest?
Buffett, consistently one of the wealthiest people in the world, isn’t a fan of the financial service industry. He often jokes about a fantasy he has, where a bunch of brokers get trapped on a deserted island with no escape. Many investors buy actively managed unit trusts, but the firms that create them have one goal: to make money for themselves.
How to increase your odds of investment success
If you think that Warren Buffett and a slew of Economic Nobel Prize winners offer valuable advice (these guys aren’t selling products) then you’ll be keen to build a diversified, low-cost portfolio of tracker funds.
In the U.S., these are called index funds. They’re extremely low-cost unit trusts that beat more than 90% of professional investors over twenty year study periods, after all fees, attrition, and taxes. Investment advisers and brokers hate these products, and they’ll usually do everything they can to deter you from buying them. Brokers, after all, make more money for themselves when selling you litter box products instead. Portfolios of actively managed unit trusts (and their hidden fees) are generally a bad deal for investors.
Choose Index Tracker funds
Allan S. Roth, adjunct professor at the University of Denver, ran a Monte Carlo simulation to determine the likelihood that an account of actively managed unit trusts would beat an account of index tracker funds. After all, a responsible portfolio would have more than one tracker fund within it: it would likely have at least a British stock market tracker fund, a bond market tracker fund, and an international stock market tracker fund.
Roth determined that, if you had five actively managed unit trusts over a 25 year period, your odds of beating a portfolio of index tracker funds would be just 3%.
If you had ten actively managed mutual funds over a 25 year period, your odds of beating a portfolio of index tracker funds would be just 1%.
You won’t find academically supported evidence to refute those findings. For the best odds of investment success, index tracker funds are the right choice. Investing is about lowering risk and putting the odds in your favour.
Twenty Five Years
One Active Fund
Five Active Funds
Ten Active Funds
Pick the right fund when investing
But not all tracker funds are created equally. Some of them can be pretty expensive. In Richard Branson’s autobiography, Losing My Virginity, he said that:
“After Virgin entered the financial services industry, I can immodestly say it was never to be the same again. We cut all commissions; we offered good value products; and we were practically trampled by investors in their rush to buy.”
The great funds that Branson touted were Virgin’s index tracker funds. But they’re too expensive. Branson’s intentions might have been good, but HSBC offers the same products at a fraction of the cost. And in the world of money, small costs add up.
Check out what a 1% difference can make over an investment lifetime:
£1,000 compounding at 7 percent interest for 50 years= £29,457
£1,000 compounding at 8 percent interest for 50 years= £46,901
If you’re twenty years old, you could realistically have money working for you until the day you die. Sure, you’ll be selling some of it to cover living costs as you retire, but you don’t want costs to anchor your money over a lifetime.