Alternative investments can make for a great way to diversify your investment portfolio. But what exactly are they? In this post we’ll look at what they are and some types of alternative investments you could make.
What Are Alternative Investments?
An alternative investment is one involving an asset not usually considered a conventional investment. Conventional investments include cash, bonds and shares.
Alternative investment types can include many different products across asset classes including collectables, commodities, private equity, real estate and derivatives.
Advantages & Disadvantages Of Alternative Investments
- Low correlation with other assets.
- Greater portfolio diversity.
- Often high returns.
- Low liquidity, meaning they are more difficult to sell.
- Higher risk than traditional assets.
- Can be harder to value accurately.
Ideas For Types Of Alternative Investments
Coin collecting is a fun hobby for many people and can also prove to be a shrewd investment. There are 2 ways that coins get their value – their metal content and their numismatic value.
Coins may be produced from both precious and non-precious metals. Most collectable coins tend to be made from precious metals like gold or silver of varying purity. So part of the value of the coin will correlate with the movement in the prices of precious metals.
The second way a coin can increase in price is through it’s numismatic value. This is the value collectors place on it. This can vary by a number of factors such as it’s rarity, condition and history.
It is this numismatic value that adds extra value to coins over the value of their metal content and why they can be a more profitable investment than just purchasing bullion. However they can be harder to value accurately. One of the top places to purchase authentic coins and collectables is at Silver Gold Bull.
Another popular collectable that can also be a good investment is trading cards. Although they may be collectable, not all trading cards are valuable. To be held as an investment they will need to be rare, in good condition and highly coveted.
Valuable trading cards are found across all types of categories with some of the most popular being sports cards like baseball and football. Other highly sought after cards include Pokemon and Yu-Gi-Oh!
There are more online platforms now available allowing individuals to invest in full or part ownership of trading cards. For instance, the Collectable platform allows investors to purchase fractional ownership of sports trading cards and other sports collectables.
Luxury fashion covers many products including clothing, shoes and handbags. Some of the most sought after brands include Louis Vuitton, Hermes, Gucci and Chanel.
Many of the world’s most exclusive fashion brands are owned by just a handful of luxury goods conglomerates such as LVMH and Kering. Fortunately most of these company shares are traded publicly on stock exchanges. This provides one of the easiest ways to invest within this sector.
There are also funds available that track the luxury goods sector. The S&P Global Luxury Index comprises 80 of the largest publicly-traded luxury goods companies. Over the past 5 years it has produced an average return of 15.17% per year.
An alternative way to invest is by purchasing the actual products directly. The exclusivity of these high end products makes them highly sought after and can often increase in value.
The Birkin bag produced by Hermes is one of the best examples of this. It is an investment that has produced better returns over the last 35 years than the stock market. Hermes keeps production low and doesn’t disclose how many are in circulation, making them highly desirable items. There’s a waiting list lasting years and prices start from thousands of dollars with some being re-sold for hundreds of thousands.
One of the top places to buy and sell authentic luxury fashion is Luxury closet.
Luxury Watches & Jewellery
Similar to luxury fashion, watches and jewellery often increases in value through their exclusivity and high end status. Most of the top high end watch and jewellery brands are also owned by the same luxury groups that own many of the top fashion brands. So again one of the most accessible ways to invest could be through company shares or funds.
Or you could purchase products and hold them as an investment, allowing them to appreciate in value over time. You will likely need deep pockets for this as it can be extremely expensive. There’s also the cost of storage and insurance to take into account. Plus some of the most highly sought after items like a Rolex Daytona watch for instance are almost impossible to purchase new unless you are in the exclusive group of customers.
Read about this in more detail in our blog post covering how to make money investing in luxury goods.
There are several ways to invest in alcohol such as whisky. This can be through stocks of alcohol companies, specialist funds or by purchasing the bottled product. There are even ways to invest directly into maturing alcohol like cask Scotch whisky.
Investments in Scotch whisky have historically produced good double digit annual returns. Between 2011-2020, returns on 8 year old scotch whisky were approximately 15.4% per year.
Whilst it can offer good investment returns there are additional costs to consider such as storage and insurance costs. With costs of both the whisky and storage it traditionally has quite high barriers to entry for most individuals.
However there are now platforms like Whisky Invest Direct that make whisky more accessible to the smaller investor. Individuals can buy and sell maturing Scotch whisky casks at wholesale prices through an online trading platform.
View our post; investing in Scotch whisky with Whisky Invest Direct.
NFTs or non-fungible tokens are a relatively new form of investment and are quickly gaining popularity. They are a type of token stored on a blockchain, which is a database that underpins digital assets like cryptocurrency.
Non-fungible means it is unique and not able to swap like for like with another. This differs to cryptocurrency where each coin is identical and you can swap for another. As each NFT is unique it can be used to prove ownership over a digital file. Pretty much any type of digital file can become an NFT including digital art, photos, documents, music and more.
Real estate includes owning property and/or land which could be either residential or commercial. Residential includes houses and apartments. Whereas commercial real estate covers assets such as warehouses and factories.
Real estate assets may provide two different forms of financial gain. Profits may come from capital gains made on the sale of a property and/or rental income. According to data by NCREIF, over a 25 year period real estate has produced annualised average returns of 10.3%. This is slightly above the S&P 500 which produced average annual returns of 9.6% over the same period.
Purchasing property either for generating rental income or to sell for profit can be expensive. This limits real estate investment to a small number of people and institutions.
Although there is an alternative way of investing in real estate that is more accessible to the ordinary investor. This is through REITs which are Real Estate Investment Trusts. REITs are companies that own real estate assets. Usually traded on a stock exchange so they are more liquid, which means easier to buy and sell.
Alternative Investments Conclusion
Alternative investments are any assets outside of traditional cash, stocks and bonds that is likely to produce a return on investment. There are many assets classed as alternative investments which we have highlighted some of these above. This includes coins, luxury goods, real estate and NFTs among others.
Of course there are many more assets that constitute alternative investments including art, antiques, cars, private equity, commodities and more.
Holding alternative assets can help to diversify an investment portfolio, adding new and interesting assets that can complement traditional assets.
You can find more articles like this on our blog including the following;
- 10 investment ideas to build wealth.
- Why you need multiple sources of income.
- Get rich slowly from compounding.
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