As the stock markets recover from the March crash, some investors may find that stocks and bonds are overvalued or wish to diversify beyond these traditional asset classes.
In this article, we will highlight 3 alternative investments that you can consider investing in besides stocks and bonds. They are also less common asset classes, so like all new investors, you need to watch out for the risk of investing in them, rather than to just focus on the potential returns.
Gold is traditionally seen as a hedge against inflation and a store of value. It is an alternative to stocks and bonds as it is an asset class that people are familiar with. Some of us would have heard stories of how our grandparents and ancestors sewed gold coins or jewellery into clothing seams during wartime. Gold has the status of being a “safe haven” asset in times of volatility.
During the March market crash, gold did hold up its status as a hedge against volatility. While the stock markets dropped more than 30% from their peaks, gold only dropped 8%. As of 25 June, gold has outperformed the stock markets at 9% above the point where the crash started on 19 February. In comparison, the NASDAQ is only 3% above its February peak, the S&P 500 is 10% below and the STI is 18% below. Gold is currently at its record high at close to US$1,800 an ounce or S$2,500 an ounce, as of June 2020.
While gold has its place in a diversified portfolio to reduce volatility in overall asset value, gold has not performed as well in the long term as stocks. Unlike stocks, gold does not pay dividends, while its price may rise and fall in accordance to demand and supply, gold does not grow in size or inherent value. A gold bar remains a gold bar whereas stocks will increase in value because a company can grow.
Over the long term, stocks have historically outperformed gold. If you have invested in gold in 2010, your gold investment will have grown by 63% in 2020. The same investment in S&P 500 will have grown by 187%. That said, there are periods where gold has outperform the stock market.
In Singapore, you can invest in gold through SGX’s SPDR Gold (Ticker: O87) or purchase physical gold and gold shares through UOB.
Risks: Gold may underperform compared to stocks and bonds over the long run and does not give you an income return. This means you also can’t earn compound interest on your returns.
#2 Bitcoin And Cryptocurrencies
Bitcoin and cryptocurrencies have been gaining mainstream attention in recent years. In simple terms, Bitcoin and cryptocurrencies are virtual or digital currencies. They do not exist in physical form like gold nor are they backed by the government like fiat currencies (which is the money we use day to day; US dollar and Singapore dollar are fiat currencies). Every single Bitcoin transaction is recorded in a public list called the blockchain.
Of all cryptocurrencies, Bitcoin is the largest by market capitalisation and is the most well-known. Bitcoin functions like a digital store of value similar to gold because there is a finite number of Bitcoin that can be created. Many Bitcoin advocates also believe that the decentralised nature of Bitcoin and cryptocurrencies is the future of money as fiat currencies devalue through quantitative easing where central banks arbitrarily increase money supply.
However, investing in Bitcoin is highly risky as its value has fluctuated greatly. Since the start of 2020, Bitcoin value has dropped to US$4,900 and risen to above $10,000. Additionally, Bitcoin has also been hit by high-profile thefts and scandals such as the theft of US$40 million from a bitcoin exchange or WireCard’s missing US$2 billion. The anonymous nature of Bitcoin has also made it a medium for unsavoury activities as such being the currency of choice for ransomware.
As Bitcoin and cryptocurrencies are still niche investments, it is not simple to buy or sell bitcoin. Regular banks and brokers do not offer cryptocurrencies and instead you would have to go to specialised exchanges such as Coinbase to trade or invest in Bitcoin.
Risks: Bitcoin and cryptocurrencies have high price volatility. It is not easy to enter cryptocurrency trading. The underlying technology is not easy to understand, and it is easy to be scammed. You or the exchange you are using may also run the risk of being hacked.
#3 Collectibles (Fine art, designer handbags, watches and wine)
Collectibles are another form of niche investment. Many people claim that their designer handbags or watches are investments but is this really true?
The key to investing in collectibles is the expertise in selecting the right pieces for investment. This holds true for all forms of collectibles, including fine art, handbags, watches or wine.
In general, well-chosen collectibles do tend to hold their value, even in times of crisis. For example, British Airways is auctioning off their art collection to raise cash to deal with the fallout from pandemic. Meanwhile, some luxury brands are actually increasing their prices. For example, Chanel has hiked the prices of their handbags by 5% to 17% during the pandemic. Sotheby’s broke their online auction record with a Rolex Daytona that someone bid up to $306,378. The Liv-ex index of the 1,000 most traded fine wines was actually positive during the March market crash; a feat that even gold cannot surpass.
Read Also: Why Are Rolex Watches So Expensive?
In general, collectibles that hold their value tend to be at the high-end of the market. Expertise in selection of the pieces is essential in making the right investment. A wrong choice may be a costly mistake as the entry prices are steep. Additionally, it may not be easy to divest your investment. Most collectibles are sold by auction and the process of finding a buyer may take a few weeks or even months.
Risks: High barriers to entry due to high capital costs and expertise required to make the right selections. The investment is also relatively illiquid as you need time to find buyers in the event that you need to sell your assets. You need to be very knowledgeable in order to select the right pieces to invest in. Otherwise, all you may end up paying for is simply a nice bottle of wine, a nice watch or an expensive handbag, rather than an investment-grade product.
As with all investments, it is a case of “buyers beware”. Always do the necessary due diligence and research before you commit to any investment. In particular, alternative investments should be more thoroughly considered before you add them to your portfolio.
Read Also: How Do Wine Investments Really Work?
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