Are you worried about the risks of the stock market?
It’s true that while some of us can be wildly successful, others suffer huge losses when investing in stocks and shares.
Therefore, we talk about diversification. This is the process of spreading your investment across different asset classes in order to reduce the systematic risk associated with your portfolio. For example, those who diversified their asset allocation before 2020 would have avoided some of the big losses associated with the 2020 stock market crash.
Now, it’s important to be aware that some alternative assets are illiquid compared to stocks, shares and bonds. The regulation surrounding these investment options might also be lacking, and some require large buy-ins that are unrealistic for those of us on a fixed income.
But, it’s important to do your research and inform yourself about the different asset classes that exist. So here are six alternative investments that you can make in order to diversify your portfolio.
- Tangible Assets
- P2P Lending
- Real Estate
- Venture ~Capital
- Hedge Funds
Tangible assets are usually a physical object that has a finite monetary value. This means that the value of the asset does not vary easily. Tangible assets are often easily converted to cash, since they have a known transactional value, rather than a theoretical value.
Examples of tangible asset categories include farming machinery, furniture or equipment for your business. Since they have a finite life span (as they are physical products), tangible assets are typically easy to value. It means that it’s easy for investors to be confident in the prices they pay.
Alternatively, tangible assets often depreciate over time so will lose value. Although this can be accounted for in business (through amortization and depreciation), it makes tangible assets less attractive for the private investor.
However, you might buck this trend by investing in some tangible assets. Gold bullions, art and wine are three examples of tangible assets that do not depreciate over time (although their value is volatile). Many investors prefer to keep a portion of their portfolio in tangible assets, since they hold their value well, and are fairly easy to offload for cash equivalents in periods of emergency.
P2P lending stands for peer-to-peer. Investors will typically head to a centralized platform and deposit credit, which may then be spread among peers requiring loans. The typical interest rate on these loans sits between 10-16%, which makes an attractive level of returns.
Some examples of popular European p2p lending platforms include Swaper and Mintos– who offer a 1% cashback every day in your first 90 days. The reason p2p lending is a good investment is that the platforms typically offer a money-back guarantee. Since they hike the interest rates up to 100 or 200%, investors are usually guaranteed their pay out every time.
Now, there are some ethical concerns with p2p lending platforms. Primarily, do you want to support a practice that may take advantage of individuals desperate for a short-term cash fix? The insane interest rates associated with p2p lending are certainly a bonus for investors, but may be crippling for the borrowers.
Real estate investment includes the likes of investment properties, house flipping and AirBnB arbitrage. This can be a super lucrative option if you get it right, but real estate investment does require a high initial deposit.
Real estate investment is attractive to investors because, very often, these assets appreciate over time. It means that they can generate two forms of income; rental and re-sale. With the current housing market “bubble”, property prices have increased significantly. This means that investors are likely to make huge profits at the moment.
Luckily, there are other forms of real estate investment that do not require huge upfront lump sums- known as REITs. These stand for “real estate investment trusts”, and are better suited for a beginner investor, or an individual with a lower cash availability.
Venture Capital investment refers to financing entrepreneurs or companies. Otherwise referred to as “startup cash”, investing in companies is for the purpose of building up their balance sheets in exchange for private equity.
Some examples of companies who have benefitted from venture capital include Whatsapp and Groupon. However, many VC-backed companies do not end in success; which is why venture capital is considered more risky than other investment types. But, as the saying goes, high risk- high reward.
Venture capitalists typically invest serially in entrepreneurship, which means that you’ll require access to a lot of cash. It’ll also be useful to have a solid network of like-minded individuals, so that you can share opportunities.
If you’re not so cash-heavy right now, then crowdfunding is a good alternative. You’ll still gain access to private companies through capital investment, but there will be hundreds or thousands of backers in order to raise the same level of capital.
Hedge funds pool together investor partnerships with a fund manager in order to build a collective investment. Because hedge funds are so large, they hold a lot of power in the market. Fund managers use short selling techniques in order to bring down the value of other stocks and reduce the risk around yours.
How do you get started investing in hedge funds?
There are a LOT of government restrictions around investing in a mutual fund like a hedge fund, and for good reason. You will require a higher risk tolerance than other investment types. They also come with a large buy-in restriction. Only institutional investors will qualify for investment into hedge funds.
If this fits with your background, you’ll be required to find a fund that’s open to accepting new members, then determine it’s minimum investment value. This can be anywhere from €100,000 to millions.
Finally, we can’t talk about asset classes without mentioning commodities. This describes the trading of physical products as a financial instrument. Unlike tangible assets, the value of commodities can fluctuate wildly depending on supply and demand.
When we discuss commodities, we are most often talking about raw materials associated with agriculture. For example, commodities include wheat, oil, corn, and livestock such as cattle. They are not typically for products in emerging markets.
You can invest in commodities via commodity funds. These are one of the few asset classes that actually rises with inflation, so your investment should be protected if it occurs. Furthermore, commodities are a good way to diversify your portfolio, as they typically work in the opposite direction of economy growth.
However, commodity funds tend to bring a high level of unsystematic risk, since they often group products from the same industry. This means that if something ruptures the industry, the entire fund will suffer losses.
It’s important to consider the pros and cons of each asset class before dedicating your money. There are also traditional pensions, stocks, shares and bond funds which may be more stable, or more liquid and easier to therefore translate into cash when necessary. Remember, all investment brings a level of risk and this is not investment advice.