The COVID-19 pandemic and resulting economic crisis are stark reminders that a diversified portfolio is key for growth
If there is one mantra that all investors should follow, it has to be ‘diversify thy portfolio’. For one, you’re safeguarding your investments against events like the 2008 global financial crisis. On a more positive note, diversifying your portfolio allows you to maximise returns because every sector responds differently to the same event.
One method of diversification would be buying into alternative investments instead of conventional asset classes like stocks, bonds, and cash. Alternative investments have a low correlation with the usual asset classes because you aren’t dependent on the stock market’s performance to drive your returns.
For instance, a pre-owned Audemars Piguet Royal Oak Ref. 15400ST released in 2012 can still fetch anywhere between $27,643 and $43,222. It costs just $26,400 at retail, representing an ROI between 4.7% and 63.7%.
If you aren’t a fan of timepieces, fret not. The options out there are aplenty and several require minimum input from you, letting you focus on your day job instead.
Not only has whisky become incredibly popular for bar-goers over the years, investors have begun to see its potential as an asset class. You have the flexibility to purchase bottles and resell them, invest in a whole cask of whisky, or buy into a whisky fund. However, this requires a very high level of expertise as you need to know which whiskies are investment-grade.
Taste usually has little to do with determining a whisky’s value, with age and exclusivity being better indicators instead. You also have to factor in market downturns due to changing consumer preferences. Whisky might be hogging the spotlight now, but it always faces the risk of being dethroned.
#2 Hedge funds
Hedge funds utilise money pooled from a group of investors to invest in assets that are fairly liquid. This gives hedge fund managers the opportunity to employ a wide variety of strategies to generate an active return for investors.
Consequently, each hedge fund caters to a different investment style (conservative, growth, aggressive), giving investors the flexibility to adequately fill the gaps in their portfolio. However, hedge funds are relatively inaccessible for retail investors. Besides the occasional friend or relative of a fund manager, requirements are otherwise strict.
The initial investment is usually substantial, ranging between $100,000 and $1 million. Secondly, the person investing needs to attain ‘Accredited’ Investor status. In Singapore, this can be accomplished by possessing financial assets exceeding $1 million, generating a minimum monthly income of $300,000, or having net personal assets exceeding $2 million (with the primary place of residence being able to contribute only up to $1 million).
#3 Robo advisors
As the name suggests, robo-advisors are automated financial advisors. These platforms rely on algorithms developed by various stakeholders (actual financial advisors, analysts, investment managers, etc.) to create portfolios and maximise their growth. Your investment portfolio is determined by factors such as risk tolerance, financial goals, and current financial situation.
Robo-advisors are a godsend for both seasoned and budding investors who would like to get started on alternative investments. The financial commitment is low, with no minimum investment for several platforms. Some even allow you to create additional portfolios or tweak the risk level of your current one.
However, robo-advisors have an unproven track record as they are a rather new alternative investment. They are also fairly inflexible due to the investment process being fully automated.
Although the mechanical watch industry was nearly driven to the ground half a century ago, investing in luxury watches today has become increasingly popular as an alternative investment. Like the Audemars Piguet Royal Oak mentioned earlier, other contemporary timepieces fetch a tidy sum on the secondary market. These include the Patek Philippe Nautilus Ref. 5711/1A and Rolex Cosmograph Daytona Ref. 116500LN, which can command up to twice their retail price.
Unfortunately, watches are subject to changing consumer preferences too. Stainless steel sports watches may be the new hotness, but there is no telling when collectors will give these the cold shoulder. Then there’s the matter of actually purchasing a watch.
Current investment-grade novelties have a waitlist at authorised dealers that can span from months to years. Therefore, having the capital on hand does not immediately translate into an investment.
#5 Peer-to-peer (P2P) Lending
Like robo-advisors, Peer-to-Peer (P2P) lending is a fairly new alternative investment. Essentially, you distribute loans to businesses and earn interest on a monthly basis just like a bank would. Businesses benefit too, with P2P lending platforms usually offering lower interest rates than traditional financial institutions and accepting firms with a lower credit score.
Like banks, you do need to consider the risk of a business defaulting on its loan. For platforms currently available in Singapore, the default rate ranges from 0% to 13.6%. The risk here is increased as P2P lending platforms accept businesses with a lower credit score, as mentioned earlier. Each platform also has a different fee structure, so do your due diligence before putting your money down.
#6 Fine Art
Collecting fine art has been the hobby of aristocrats for centuries. Today, fine art serves as both a conversation starter and as a valuable asset. In 2018 alone, sales in the global art market reached US$67.4 billion (S$91.6 billion). Connoisseurs are not deterred even as the global economy faces negative growth. Over 80% of high net worth collectors have indicated that COVID-19 did not dampen their interest, if not giving them a bigger urge to collect.
However, investing in fine art is akin to holding bonds. The investment horizon is at least a decade, making it one of the most illiquid asset classes on this list. Like whisky and watches, you are at the mercy of changing tastes. For example, Vincent van Gogh’s works might be among the most expensive in the world now, but they failed to gain traction while he was alive.
Alternative investments are a boon for investors who have had their skin in the game for a while and are looking for an additional way to hedge their portfolio against events like the current COVID-19 pandemic. Each alternative investment caters to a different risk tolerance level and fills different gaps in your portfolio.
Furthermore, several alternative investments benefit hobbyists who can leverage on their extensive network and knowledge regarding a particular asset class. That’s one way to have your cake and eat it too. And how often does that happen while investing?