When someone says investing, you instantly think of stocks, SIPs, mutual funds, etc. But some investment assets are not affected by the ups and downs of stock charts. And investing in these alternative assets is an important step towards financial freedom!
Let’s understand alternative investments in detail – Alternative investments offer higher returns, lower correlations and the ability to invest in areas that may not be available through other investment strategies. Diversification is one of the main reasons why many investors choose alternative investments.
These assets are generally held by individuals and the volatility is therefore very low. Stock markets are highly unpredictable, even in a stable economy, and alternative assets are a great way to protect your investments from public market fluctuations.
Let’s say you own a property that you have rented out to a tenant. From now on, the rent of your property will not be affected by the vagaries of the market. Thus, it becomes an alternative investment.
They are also a great way for institutions to build and protect their portfolios. Investing here is like creating an investment portfolio away from traditional investments, which consequently reduces the overall risk of the portfolio. Volatility might not be a reason for a long-term investor to put their money here, but the thing to keep in mind is that volatility kills capitalization. If you wait 10-20 years for an average return of 10%, and in the middle of those 10 years the stock market crashes continue to occur, your returns will also be deeply affected.
Alternative assets have the potential to offer much higher returns than their traditional counterparts. It is also one of the main reasons why investors are attracted to it. Although results are not guaranteed, the potential for much higher returns than usual stocks is very high.
There is also a sense of direct ownership. Suppose you own shares in a wine company, it does not mean that the company belongs to you and you can make the decisions for this company. Now, contrary to that, if you own a bottle of wine, you get a sense of complete ownership. You can make all the necessary decisions related to this investment.
One can also benefit from tax advantages by investing in alternative assets. With many alternative investments, you keep more of your profits through the structure.
It is also considered a category of investment strategies based on the assumption that traditional investment capital markets are inefficient and often mispriced. This is true in many cases. With alternative investments, you get the true value of the things you own without risking their market value.
Here’s why they’re a smart choice for portfolio diversification.
BOTTLE OF WINE
You can own a bottle of wine, keep it for as long as you want, and then resell it for a much higher price. This is because the value of wine appreciates over time. Wine is rated on its rarity, blend, label reputation, and longevity, so keep that in mind before you do anything.
What started with a few million, is now around a $5 billion market; this is about 65% more than ten years ago. And the market continues to grow further. Even in extreme situations like the Covid-19 pandemic, the performance of wine investments has not been affected as it is independent of financial crises.
The same goes for whiskey investments. Its value increases with age. Many people like to collect a collection of limited edition branded whiskeys and are willing to bid a good amount for each bottle. The rarer your bottles, the higher their value.
The value of whiskey depends on its age, bottling date, year of distillation and the reputation of its label. This investment is also independent of any financial crisis.
Wine and whiskey are one of the few alternative investment classes that are picking up trends lately.
Here are some other new alternative investment assets:
1. Music royalties: Help an artist create their song, own certain music royalty rights, and you earn money every time that song is played.
2. Arts: People are willing to pay a crazy amount for art and painting. Own paintings for less than the auction price and sell them to the person who falls in love with them. They will surely pay you whatever you ask to buy their favorite paintings.
3. Litigation Funding: It’s like making money from other people’s lawsuits. You help a plaintiff with the finances of filing the case like transportation, attorney fees, etc., then earn a percentage of the claimed money they get if they win. The only thing to keep in mind is that if he loses, you lose all your money.
(The article is written by Chitra Kadam, Financial Engineer, Hedonova)