Alternative Investments

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Since the Credit Crunch economic crisis circa 2007, traditional investments in stocks and shares have been far less popular. Previously, stocks and shares had been seen as a safe haven for your savings, where investments could mature and generate profit for the investor. The sudden market crash of the mid naughties illustrated that traditional investment opportunities were not the best way to generate returns, or even to keep money safe for a rainy day. Due to this, investors have been seeking out new ways to make their savings work for them through the use of alternative investments.

Alternative investments are hard to define, as they can take many forms. For example, coins and stamps, precious metals, artwork, vintage cars and fine wine are all ways in which the modern saver is choosing to invest their money. Financial assets such as venture capital and property, trusts and funds are also ways in which the alternative investor can generate returns. These financial assets are not as straightforward as coins and stamps and so on, however with careful portfolio management and expert market analysis advice, investors can generate excellent returns without having to resort to taking the types of risks that are usually associated with buying stocks and shares.

Many indications show that alternative investments actually perform better in the long term; the stock market depends largely on social trends; artworks, precious metals and other alternative investments are timeless and will, therefore, sit well in a retirement plan or in your plans for saving for your children’s futures. One such alternative investment is in fine wine. This article will outline the pros and cons of a range of investment opportunities as it is important for all investors to recognise the types of investments available to them; from traditional to alternative. At Global Wine Exchange, we can help investors to make the best choices available to them using our expert knowledge of the fine wine market. However, it is always best to make an informed decision about your investment portfolio.

Types of traditional investments:

Traditional Investments: Stocks

When one purchases a stock, one is essentially purchasing a very small part of that company. It means that the investor gains a claim of that portion of the company’s assets and earnings. The more stock in a company one acquires, the more entitlement they have over the assets and the larger their stake in the company becomes. There are thousands of companies to choose from, with new startups emerging all the time. One of the benefits of an investment in stocks is that an investor has the opportunity to generate a very unique stock portfolio according to their interests. However, the stock market is volatile and can rapidly change from day to day, so it is necessary to regularly track stock investment to ensure that they are generating profit rather than loses.

Pros: Tailor-made portfolio opportunities, potential for substantial returns on investments.

Cons: Stock management can be time-consuming, the market can be volatile.

Traditional Investments: Bonds

A bond is similar to an IOU. When you invest in a bond, you are essentially lending that money to a company, government or any other issuer for a set period of time. The issuer must repay the original amount of capital borrowed, plus the interest that has been accumulated over the period of lending. The interest rate will be agreed prior to the bond being issued and will be at a fixed rate, so you know exactly how much your return will be.

Pros: Low volatility, fixed term and return.

Cons: No opportunity for higher gains, direct exposure to interest rate risk.

Traditional Investments: Cash savings

Cash was once king when it came to savings. However, banks and building societies are no longer in a position to offer the incentives they once were able to reward you with for saving your money with them. Of course, everyone is entitled to use their tax-free ISA allowance, which for 2018/19 is £20,000. This can be split in a multitude of ways, but you won’t pay any tax on returns for the initial £20,000 investment.

Pros: Low risk, easy to access and understand.

Cons: Very low returns with no guarantee of growth.

Equities

Equities are shareholdings. What this means is that an investor can buy shares in a company and be entitled to an equity stake in the profits made by the business. It is one of the oldest and well-established methods of traditional investment. An investment in equities is reliant on the business being successful and generating a strong profit. Many companies offer perks for their shareholders, such as discounts on their products or services. Equities are popular because they have historically outperformed more regular means of investment such as bank accounts and bonds.

Pros: Voting rights in the company, perks from the company, the potential for attractive returns.

Cons: Seen as a high-risk asset.

Alternative Investments:

Types of alternative investment:

Fine wine

For the last 50 years or more, the fine wine market has remained steady and stable, even during the bleakest of economic downturns. A fine wine investment can range from a single rare bottle to an entire cellar and it has demonstrated consistent low-risk yields for investors. Fine wine can be purchased independently or through a merchant or trader such as Global Wine Exchange, who can advise you on the most profitable investment opportunities available on the market. Some investors may find the act of sourcing and collecting wine just as enjoyable as the tax breaks and returns that a fine wine collection generates. Because fine wine is deemed to be a ‘wasting asset’ – as in it is an asset thought to last 50 years or less, the investment is essentially tax-free. An investment in fine wine is of course not without risk, but the risk to return ratio is quite appealing.

Pros: Tax exempt, enjoyability factor, continuous growth, high profitability.

Cons: Requires expertise to get the most out of the investment.

Precious Metals

Precious metals like gold and silver are historically one of the most desirable investments to acquire. Recognised as an asset throughout time, precious metals are still very much a commodity today. One of the main drivers for the gold market is sentiment rather than supply and demand, meaning that people always want to own gold products. Its value is evaluated 24 hours a day, 7 days a week on the market. Silver is also valuable in terms of it being an industrial metal and in demand for trade purposes. Because silver is more of a functional product, it tends to be a little more volatile than gold in terms of value fluctuations.

Pros: Physical value, steady growth over time.

Cons: Prices can be volatile and finding a reputable dealer for precious metals may be challenging depending on market conditions.

Futures

This is essentially where an investor enters a contract to agree to purchase an asset or commodity at a future date and price. This a short-term investment that enables the investor to generate profit from an asset’s price trends without ever actually having to own the asset.

Pros: Potential large gains, great for diversifying a portfolio.

Cons: Can be difficult to understand without expert guidance, high risk.

Property

Bricks and motor are one of the most common and popular forms of investment for larger sums of cash. Traditionally, the property market has been a safe way to invest capital and generate a regular income from collecting rent from a buy-to-let arrangement or buy renovating and selling for a higher price. Some investors may also turn to property management companies in order to generate returns without having to buy an entire property.

Pros: Stable investment, physical asset, tax benefits.

Cons: a Large amount of initial capital required, ongoing costs.

Art and other collectables

We all hope to find a valuable antique tucked away in the loft that can be sold for vast amounts of money. However, if you have no such luck, then you can invest in art pieces and other collectables that may become more valuable with time. Limited edition collectables and original artwork are a great place to start and may become an exciting and interesting way to invest savings for a collector passionate about art. However, the high returns that an investor hopes for are at the mercy of future supply and demand and also on changing tastes over the years. Just because it looks great now, doesn’t mean that collectors in 20 years’ time will enjoy the piece and want to invest in it themselves.

Pros: Enjoyable investment, not affected by inflation or interest rates.

Cons: A very long-term investment, no income, potential for loss or destruction.

Currency

Many of us only change our cash into foreign currency when we are planning to go abroad on holiday or for business. However, the Forex (foreign exchange market) works 24 hours a day and traders bet on how valuable a currency will be relative to another one. For example, one might invest in USD if it looks like the currency will become more valuable relative to Pounds Sterling. This can generate great profit – but also great loss!

Pros: No commission, highly liquid asset, high level of leverage.

Cons: Potential for substantial losses, complex market to understand, hard to find trustworthy currency brokers.

Oil

Oil is one of the most desirable commodities on earth. So much so that it has achieved the moniker of ‘black gold’ among the investment community. There are a diverse number of routes that an investor can take into an oil investment. For example, one might invest in oil futures options or one could even purchase EFTs, which are exchange-traded funds. This can be done directly or even through an energy sector. An investment in oil has great potential for tax breaks, but it can be high risk and not without its ethical challenges.

Pros: High-profit margins are possible, tax breaks.

Cons: Can be an unethical, highly volatile market, the commission can be very high.

Funds and trusts

Funds are usually known as Oeics in the investment community. This stands for “open-ended investment company.” Each individual invests their money into a shared pool, similar to crowdfunding. The investment pool is then used to invest in alternative funds or even shares. This is a relatively low-risk investment as the fund will be used to invest in a range of shares, bonds and so on. This means that if one company crashes and the shares lose value, the cost is lower than if the investor had put their whole investment into that company directly. It does also mean, however, that profits are shared by other investors in the pool, lowering potential returns.

Pros: Low risk with the potential for growth.

Cons: Can be complex and management charges can be costly.

 

With such a wide range of investment opportunities to choose from, it can be daunting for a first-time investor. However, all investors should recognise the benefits of diversifying their portfolios to create higher returns and lower the risks to their savings. Investments need to be added to regularly in order to get them to work best, with a range of different asset classes.

Fine Wine is an excellent means to diversify one’s portfolio, due to the long and medium-term investment opportunities and it’s performance in generating returns. To invest in fine wine as a part of your overall investment portfolio is an excellent decision and one that can be made in conjunction with Global Wine Exchange, who can guide you through the process and make the best choices for your diverse investment portfolio.

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