In the world of investing, you may have heard about the usual suspects: stocks and bonds. But have you ever wondered if there are other, less-discussed options out there?
Spoiler alert: there are!
These lesser-known options are called alternative investments, and they allow you to diversify your portfolio.
Alternative investments encompass a wide range of assets that aren't your typical stocks or bonds. These include real estate, private equity, hedge funds, and even more unconventional options like cryptocurrency, antiques, fine art, rare wines, and luxury handbags. Yes, you read that right—luxury handbags can be an investment!
What are alternative investments?
Alternative investments are just that—alternatives to traditional stocks and bonds.
They include a wide range of investments like real estate, private equity, hedge funds, cryptocurrency, and even tangible items like antiques, art, rare wines, and luxury goods. If it isn’t a stock or a bond, it likely falls into the alternative investments category.
Characteristics of alternative investments
They may be less liquid
Many alternative investments are not traded on public exchanges. This means they can be harder to buy and sell quickly compared to traditional investments.
For example, if you want to sell a painting you may choose to auction it, which requires marketing and happens on specific dates, or negotiate a private sale, which can also be time-consuming.
Even after finding a buyer, completing the transaction involves contracts, payments, and delivery, making it a lengthy and involved process compared to the near-instant liquidity of stocks.
You may need specialised knowledge
Investing successfully in alternative assets often requires specialised knowledge. For example, not many people are experts in fine art or vintage wines. Before selling a painting, you may need to have it appraised and authenticated, which adds more time and costs to the process.
They may have a higher barrier to entry
Alternative investments often require more upfront capital and incur higher fees. Access to knowledgeable experts can also be necessary.
Investing in real estate, like buying a rental property, is one example of how alternative investments can require more initial cash and entail higher fees than traditional investments.
Unlike stocks, which you can acquire with a relatively small amount of money, purchasing property requires a substantial down payment — which could be at least tens of thousands of dollars.
Additionally, there are closing costs, property taxes, insurance, and maintenance fees that quickly add up. You will also likely need help from experts like real estate agents, lawyers, property managers, and contractors to navigate the whole process.
This higher barrier to entry and the need for specialised expertise make real estate a more complex and costly investment compared to just buying stocks.
Some alternatives like private credit, are only accessible to accredited investors in Singapore.
Improved accessibility
Access to some alternative investments has improved over the years.
For instance, instead of buying an entire property, which can cost hundreds of thousands, you can invest in a Real Estate Investment Trust (REIT) for as little as $100.
Are alternative investments risky?
Just like all investments, alternative investments come with their own set of risks, which can be quite different from those you're familiar with if you primarily invest in stocks.
Stocks are typically influenced by company performance and overall market conditions. If a company performs well, its stock price usually rises. If the market takes a hit, stock prices might fall. Alternative investments can also be influenced by various other factors.
Liquidity risk
Consider real estate, fine art, and rare antiques, for example. These assets are generally less liquid than stocks, meaning they can be harder to sell quickly if you want to. Imagine trying to sell a property or a rare painting overnight— it’s not as straightforward as selling a stock with a few clicks.
Then there's hedge funds and private equity, where you're often looking at a commitment period of two to five years, during which your money is tied up and not easily accessible.
Volatility
Some alternative investments like cryptocurrencies are much more volatile than stocks. Their prices may fluctuate more drastically and frequently. On the flip side, real estate tends to be less volatile than stocks, providing a more stable investment but with its own challenges.
Regulatory risk
Besides liquidity and volatility, there are other risks to keep in mind. Regulatory risk is a significant one. Alternative investments often face different regulations depending on the country and asset type. For example, cryptocurrencies are subject to regulatory scrutiny and changes, which can impact their value and legality.
In Singapore, the Monetary Authority of Singapore (MAS) regulates cryptocurrency under the "digital payment token" license, but rules can evolve.
Understand the risks
So, remember: each type of alternative investment has its own unique set of risks. It's crucial to understand these risks thoroughly before diving in. Do your homework, consult with experts if needed, and make sure these investments align with your financial goals and risk tolerance.
How Alternative Investments Are Becoming More Accessible
In the past, alternative investments were often reserved for the wealthy or institutional investors due to high entry costs and limited access. But the landscape is changing, making it easier for individual investors to tap into these opportunities.
For instance, investing in real estate traditionally meant buying physical properties, requiring substantial capital, time, and expertise.
Now, with REITs, you can invest in a diversified portfolio of real estate assets without purchasing and managing the property directly.
REITs pool money from multiple investors to buy and manage income-generating real estate like malls, office buildings, or apartments. This allows you to start with a relatively small amount of capital—often as low as $100—making real estate investment accessible to more people.
Private equity, which used to be the domain of accredited investors who met high net worth or income thresholds, is also more accessible to retail investors.
One example is the Astrea Private Equity (PE) bonds managed by Azalea Asset Management, a 100%-owned subsidiary of Temasek Holdings Pte Ltd.
These PE bonds allow individual investors to gain exposure to a diversified portfolio of private equity investments with a much lower minimum investment than traditional private equity funds. In the case of Astrea’s PE bonds, you can invest for as little as S$1,000.
These products are structured to offer a balance of potential returns and manageable risk, making private equity more approachable to a broader audience.
Digital platforms and robo-advisors also help make alternative investments accessible by fractionalising your shares. Basically, you can invest in a portion of an asset rather than having to buy the entire asset.
Is investing in alternatives the right move for you?
If you are a novice or beginner investor, diving into alternatives might not be the best first step.
These types of investments often require specialised knowledge and come with unique risks that can be tricky to navigate if you're just starting out. Plus, if you're risk-averse and don’t have the time to thoroughly research each asset, sticking with more traditional investments like stocks and bonds might be a better idea initially.
Traditional investments are simpler to understand and manage, providing you with a solid foundation before venturing into more complex territory.
On the other hand, if you’ve been investing for a while and have a good grasp of the risks involved, adding some alternative investments can be a way to diversify your portfolio.
Diversification can help spread risk and potentially boost your returns. For example, some investors consider it wise to allocate no more than 5% of their overall portfolio to cryptocurrencies. This approach allows you to get exposure to this asset class without overcommitting.
Ultimately, the key is to ensure that your investment strategy aligns with your experience level, risk tolerance, and financial goals.
Alternative investments can offer great opportunities, but it's crucial to understand what you're getting into. Take the time to educate yourself, maybe start small, and always keep an eye on how these investments fit into your broader financial picture. Investing wisely means being well-informed and thoughtful about every move you make.
