Have you ever asked yourself how to invest money? Has a painting from an up-and-coming artist caught your eye in a local gallery? Or have you considered fixing up vintage cars and reselling them at a mark-up? These are all forms of alternative investments. If you want to diversify your assets and think outside the stock market box, alternative investing may seem like an intriguing prospect. Yet it comes with a raft of risks to think about at the same time, so it’s important to research all of your options carefully before you take the leap.
What is an alternative investment?
Basically, anything that falls outside of the usual property, cash, shares, and bonds can be classified as an ‘alternative’ investment. Two of the most common investments are a buy-to-let property or small business, but this could also include everything from jewellery to fine wine or antiquities. Here’s a list of the most common types of alternative investments in the UK:
- Gold
- Bridging loans
- Buy-to-let properties
- Angel investing
- Forestry
- Jewellery
- Fine Wine
- Fine Art
- Classic Cars
- Crowdsourcing
- Peer-to-peer investment
- Coins
- Stamps
Most alternative investments are riskier than the usual shares and bonds, with some carrying a very significant risk. As a result, it’s important to do your research and brush up on the dos and don’ts mentioned below.
The Dos
DO understand the risks.
Traditional investments and bank deposits are backed by the Financial Services Compensation Scheme in the UK, but alternative investments don’t carry this same protection. If you invest in a company that goes bust, you could lose everything. It can also be more difficult to find impartial information about alternative investments and their value. Finally, it’s important to understand that they can be quite volatile in comparison to shares and bonds. While this means you could enjoy significant gains, it could also lead to a major loss with no safety net.
DO become an expert.
Alternative investing is all about choosing a niche. You’ll need to really do your research before putting any money into the investment, so select a niche and then get your hands on any and all information that you can about it. For a buy-to-let property, this would involve researching up-and-coming locations and their rental markets. For jewellery, you’d need to research sales trends and the vintage eras in hot demand. Are you thinking about investing in a small business? Be sure to carefully view their sales figures and marketing plan, and compare this with the company’s competition.
DO keep your goals in mind.
What are you looking for out of this investment? Are you simply looking for a way to expand your portfolio for the long term, or are you looking for an investment that will provide a steady income? Think long and hard about your strategy before you jump in. If you need an income from your investment, putting your money into a buy-to-let property would make more sense than becoming an angel investor for a new start-up company, for example.
The Don’ts
DON’T get your hobbies and your finances mixed up.
Just because you’re an auto buff doesn’t mean that investing in classic cars will be the best option for you. Do you like wine tasting? That doesn’t mean that you should sink £5,000 into a pricy vintage bottle. While it helps to have an interest in the niche you choose, you need to make your investment based on hard facts rather than simply what you like. You could sour on your hobby quickly if you end up taking a big financial hit!
DON’T expect short term rewards.
If you’re buying a collector’s item in particular, it’s important to look at it as a long-term investment or even an heirloom to pass down to your children. One way to invest one’s money is to buy loose diamonds. Usually, you will invest in diamonds that are exceptional in colour, clarity and/or carat weight (from 5 to 20). Diamonds being a scarce but valuable resource, the number of people investing in them has been steadily growing since 2009.
Why? Because a good diamond should always be increasing in value, because the fear or economic recession has led people to invest in physical assets, rather than shares and actions, and because unlike other expensive objects, they don’t require maintenance and don’t come with continuous taxes. Diamonds are also timeless and can be kept in the families for several generations, becoming a family jewel, for example with wedding and engagement rings.
Nevertheless, they can reveal to be a tricky investment. Indeed, they are very hard to resell, even to major manufacturers. So if you wish to invest, make sure the diamonds you selected are properly examined and evaluated before buying. Then, take time to decide whether this is the right investment for you.
DON’T invest more than you’re willing to lose.
It takes time to turn a profit from many forms of alternative investment. Can you wait to get your money back if the price of a commodity plummets? Can you wait for a small business that you’ve helped crowdfund to get on its feet? Can you afford to take the hit if that small business crumbles? Alternative investing is risky, so don’t gamble more than you can afford to lose. Even if you’re an expert in your given niche, you’ll still want to safeguard the majority of your funds in a more conventional scheme.
The Bottom Line
If you have extra cash on hand and are looking for a unique way to diversify your portfolio, alternative investing can be an appealing option. Go into this process with eyes wide open and choose a niche that you’ll enjoy exploring in greater depth. It’s important to realize that alternative investments vary quite widely in terms of risk and reward. One of the least risky options is a structured product, which offers a return at the end of a predetermined time period depending on stock market performance, for example. In the end, for those with the money to spare alternative investing can be a high-risk, high-reward option to supplement primary investment options.
Image Source: Pixabay
Image Source: Pixabay