Understanding Alternative Investments: Should You Invest In Alternative Assets?
By David Pritchard
Could fine wine and art have a place in your investment portfolio?
Beyond traditional stocks and shares, there are other exotic ways to generate returns on your investment – as long as you know what you’re doing. They’re called alternative investments. Alternative investments have been around for many years – albeit having a relatively low profile among mainstream investors.
But what are these alternatives? And are they better than your traditional equity markets?
Read on to find out more.
What are alternative investments?
Alternative investments are investments outside the scope of conventional assets (such as stocks and bonds). These can be commercial property, infrastructure or, in many cases, collectables such as antiques, art, classic cars and fine wine.
For the purpose of this blog, most of our focus will be on collectables.
These assets – when purchased through a reputable dealer who knows the market – can be a useful addition to your investment portfolio. However, there are a few downsides to be aware of.
The cons of collectable investments
A major downside to these assets is that they typically do not generate income comparable to an equity portfolio.
Unlike an equity portfolio which is easily sellable, investable and pretty liquid (meaning you could sell it today and get your money in a few days), collectables often lack these advantages. If people don’t like the piece of art or vintage wine you have, you may not be able to sell it as quickly or for as much as you would wish.
There’s also the fact that you need to store the item and insure it, all of which costs money. So, it’s highly important to consider carefully whether these added costs will wipe out any returns you earn on the asset.
Should you invest in alternative assets?
Investing in something like art or antiques can be an interesting hobby, no doubt. But, I certainly wouldn’t suggest that they should form the bulk of your investment portfolio unless you’re an expert in the specific field.
We once had a client who invested tens of thousands of pounds into a wine collection without prior consultation. It turned out that the fees he paid were over the market average, and his storage costs were also higher than usual. In the end, he managed to get rid of the wine – though not without losing a significant amount of money.
That’s why it’s so important to speak to an independent financial adviser before you inject money into any asset at all.
In a nutshell
To round up: many physical alternative investments can be beneficial in the sense that in addition to it being an investment, you can physically own the assets and even get to enjoy them in the meantime. But as with any other investment pathway, you need to watch out for potential pitfalls.
Essentially, it’s still risky to invest in anything – whether that’s commercial property, fixed-interest funds or collectables. So, if you have an interest in collectable assets, do your research and find a reputable dealer to help you. Bear in mind that these dealers will always try to sell you something in order to make a profit.
In addition to these best practices, diversify your assets and compare your return on investments after costs to see if it’s a better or similar return to what an equity-based portfolio would typically yield.
For more information on alternative investments, check out the latest episode of our podcast, A Dab Of Investment.
The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.
The value of your investment can go down as well as up, and you may not get back the full amount invested.
Past performance is not a guide to future performance.