Alternative Investments: What is the best way to invest money?

 

Alternative Investments: What is the best way to invest money?

 

•  PART 1: Introduction

•  PART 2: Types of Investment

•  PART 3: Investment diversification – Why is it important?

•  PART 4: Investment Comparison

•  PART 5: Fine wine – What makes it a good investment?

•  PART 6: Conclusion – What alternative investment is best for you?

•  PART 7: Frequently Asked Questions

•  UPDATE: Fine Wine Investment After Brexit

 

PART 1: Introduction

 

It’s the financial world’s Holy Grail: an investment that generates good long-term returns while posting gains when traditional investments are suffering – the quest for which has taken on a greater urgency since the economic crisis of 2007. As such, investors are increasingly turning their attention to so-called alternative investments.

The term ‘alternative investments’ is relatively loose, and includes tangible assets such as precious metals, art, wine, antiques, coins and stamps, plus some financial assets such as property, venture capital, funds and trusts. Investing in these assets is not always as straightforward as traditional investments, such as stocks and bonds, but with careful portfolio management and market analysis investors can expect decent long-term returns with less of the risk traditionally associated with the stock market.

In fact, much research indicates that alternative investments perform better than traditional investments in the long term, and as such they’ve taken on a new role in the world of retirement planning and building long-term savings for children.

This report provides a thorough grounding in alternative investments, covering the types of investments available – and how they stack up against traditional investments – the importance of diversification, how to ensure your portfolio is well-balanced, the increasingly lucrative role of fine wine in the alternative investment market, and strategies for identifying how to invest your money best.

 

PART 2: Types of Investment

 

I. Fine wine

Investing in wine, whether that be a rare bottle, a case of highly-regarded First Growths or an entire cellar, has consistently yielded decent low-risk returns. In fact, for the last 50 years the fine wine market has remained stable, despite the world’s economic crises. Wine can be purchased independently, via merchants or traders, or at fine wine auctions. For many oenophiles, the act of obtaining sought-after bottles and building a collection is just as enjoyable as the financial benefits afforded by investing this way. Wine is a wasting asset, so investment is tax free, and while it – like all investment options – is not entirely risk free, it offers reasonable risk to return correlation. An investment strategy that accommodated high or medium risk would naturally yield higher returns.

Pros: High profitability, tax exempt, continuous growth.
Cons: Price volatility despite overall growth and required expertise.

 

II. Traditional investments: Stocks

A stock, put simply, is a share in the ownership of a company. Stock represents a claim on a company’s assets and earnings, and as an investor acquires more stock, their ownership stake in the company becomes greater. With a huge number of publicly traded companies (there’s more than 2,000 on the New York Stock Exchange alone), investors have the opportunity to assemble a unique portfolio that meets their investment objectives.

Pros: Potential for substantial returns, can tailor portfolio to suit risk tolerance.
Cons: Market volatility, management can be time-consuming.

 

III. Traditional investments: Bonds

A bond is a debt security, much like an IOU. If you invest in a bond (that is, you ‘buy’ a bond) you’re essentially lending money to the issuer, which may be the government, municipality or corporation, for a certain period of time. The issuer returns the original amount borrowed (the capital), plus interest accumulated over the period of lending, at a previously-agreed fixed rate.

Pros: Fixed returns, low volatility.
Cons: Fixed returns mean no opportunity for higher gains, direct exposure to interest rate risk.

 

IV. Traditional investments: Cash savings

Thanks to spiralling interest rates, cash is no longer king when it comes to savings, with banks and building societies offering very little reward for entrusting them with your money. That said, every smart investor should make sure they’re taking advantage of their tax-free allowance with an ISA. The ISA limit for 2016/2017 is £15,240, which can be split however you like between a cash ISA and a Stocks & Shares ISA, with the latter offering better potential for returns.

Pros: Low risk, easy access, easy to understand.
Cons: Very low returns, Stocks & Shares ISAs offer no guarantees of growth.

 

V. Equities

Equities represent one of the oldest and most traditional ways of investing. Here, an investor buys shares in a company, and as a shareholder they have an equity stake in the business – they’ll receive a portion of the profits if a business is successful. Historically, equities have outperformed ‘safe’ investments such as regular bank accounts and bonds, and shareholders are sometimes eligible for certain additional perks, such as discounts on products and services.

Pros: Potential for attractive returns, gives you certain voting rights within the company.
Cons: Often seen as a high risk asset class.

 

VI. Precious metals

Gold and silver have been recognised as valuable since the dawn of time, and even today they have an important role to play on the investment landscape. The value of gold is determined by the market 24 hours a day, with trade relying more on sentiment and less on supply and demand. Silver, on the other hand, is attractive both as a store of value and as an industrial metal. As such, its price fluctuations are often more volatile than gold.

Pros: Inherent physical value, slow and steady growth over time.
Cons: Volatile prices, finding a reputable precious metals dealer can be challenging.

 

VII. Futures

Investing in futures means entering into a financial contract that obliges the buyer to purchase an asset, such as a physical commodity or a financial product, at a predetermined future date and price. Futures are a way to profit from securities' short-term price movements and trends, both up and down, without actually owning the underlying asset.

Pros: Many opportunities to invest, useful for diversifying a portfolio, potentially large gains.
Cons: High levels of risk, challenging to understand.

 

VIII. Property

Property is one of the most common types of investments, representing a relatively safe haven for money in a market where property prices continue to climb. There are two main ways of making a return: buy-to-let, where you earn an income by renting the property to tenants; and selling for profit, where you buy a property, potentially renovate it and then sell it for a higher price. It’s also possible to invest in property management and maintenance services.

Pros: Stable investment, tax benefits, leverage.
Cons: High entry cost, ongoing costs, lack of liquidity.

 

IX. Art and collectibles

Art and collectibles make interesting investments and can be a good way to diversify your portfolio. Plus there’s the potential for high returns – everyone is familiar with episodes of The Antiques Roadshow where unsuspecting individuals strike it big. But the value of art and collectibles hinges almost entirely on supply and demand – how much do other people want them? Plus, collectors’ changing tastes will affect their value, too.

Pros: Guards against inflation, not affected by interest rates, enjoyable investment.
Cons: No income or dividends, counterfeiting is a risk, potential for destruction.

 

X. Currency

For many people, the foreign exchange market (Forex) is a means of changing one currency into another. But the market (which runs 24 hours a day) is also occupied by traders who bet on movements of currencies relative to each other. For example, the euro will go down and the dollar will go up. There are a vast number of bet options and numerous ways to participate in this market, but both profits and losses can be significant.

Pros: High leverage, no commissions, highly liquid.
Cons: Very complex, potential for substantial losses, rogue brokers.

 

XI. Oil

Commonly called ‘black gold’, oil remains one of the most sought-after commodities on the planet. There are a number of ways for investors to get involved with oil, with varying degrees of risk. Purchasing oil futures or oil futures options is one method, buying commodity-based oil exchange-traded funds (ETFs, which trade on the stock exchange) is another. Investors can also gain indirect exposure to oil through energy-sector ETFs.

Pros: Potential for high profit margins, efficient way of balancing portfolio, tax advantages.
Cons: Volatile and potentially high-risk market, high commission, ethical challenges.

 

XII. Funds and trusts

Funds are typically referred to as unit trusts or Oeics (open-ended investment companies), and are essentially funds where investors’ money is pooled to invest in shares, bonds or other alternative fund. As the fund invests in lots of different companies’ / private companies' shares or bonds, risk is reduced – as such they’re usually recommended to small investors with a low to moderate risk appetite.

Pros: Good potential for long-term growth, relatively low risk.
Cons: Baffling array of fund alternative options, often high management charges.

 

PART 3: Investment diversification – Why is it important?

 

Every smart investor knows how important it is to keep their portfolios diverse. This helps protect against risk and produce stronger returns. Regular rebalancing is one way of doing this. Simply put, this means buying and selling portions of your portfolio in order to set the weight of each asset class back to its original state. This is because the asset mix originally created will inevitably change as a result of differing returns, so the percentage you’ve allocated to different asset classes will change, which can create additional exposure to risk, and potentially minimise returns on high-performing assets at a later date.

Add to your investments on a regular basis – don’t just squirrel a lump sum away to accumulate lethargically – and know when to cut your losses. Wise investment is a long-term game, and it’s often necessary to weather some losses in order to enjoy greater returns in the long run, but sometimes it’s smarter to get out sooner rather than later.

Most importantly, however, keep your investments in different asset classes, as each will have a different performance timeframe and level of associated risk. Including an alternative investment, such as fine wine, gives your investment portfolio a more balanced dynamic and offers a safer haven for your cash than traditional investment instruments.

 

PART 4: Investment Comparison

 

StarWine

Minimum Investment: £5,000
  • Risk:LOW
  • Term:5 Years
  • Benefits:Tax Free Investment
  • Flexibility:MEDIUM
  • History:Up 144% last 10 years
  • Annual Returns:Avg 10%
  • Transaction costs:Around 10%
  • Transparency:HIGH
  • Specialism:HIGH*

    • Tangible asset
    • Finite and enjoyable product
    • Low Production / High Demand
    • Beware tricksters
    • * Needs expertise or a portfolio manager with industry knowledge - Contact Cult Wines

Stocks

Minimum Investment: £1,000
  • Risk:HIGH
  • Term:10 Years
  • Benefits:Up to £15,240 tax free
    within ISA wrapper
  • Flexibility:MEDIUM
  • History:Up 61% last 10 years
  • Annual Returns:Avg 7%
  • Transaction costs:0.25% - 5%
  • Transparency:LOW
  • Specialism:MEDIUM

    • Choose your level of risk
    • Be prepared to spend time on your portfolio
    • Susceptible to volatility

Bonds

Minimum Investment: £5,000
  • Risk:LOW
  • Term:5 Years
  • Benefits:Withdraw 5% a year
    without paying additional
    tax immediately
  • Flexibility:LOW
  • History:Flat last 10 years
  • Annual Returns:Avg 5%
  • Transaction costs:N/A
  • Transparency:LOW
  • Specialism:LOW

    • Useful way to diversify portfolio
    • Steady, predictable returns
    • Capital remains at risk

Cash

Minimum Investment: £1,000
  • Risk:LOW
  • Term:10 Years
  • Benefits:Up to £15,240 tax free
    within ISA wrapper
  • Flexibility:HIGH
  • History:Flat last 10 years
  • Annual Returns:Avg 2%
  • Transaction costs:N/A
  • Transparency:HIGH
  • Specialism:LOW

    • Most straightforward way of saving
    • Zero risk
    • Minimal ROI

Equities

Minimum Investment: £500
  • Risk:HIGH
  • Term:5 Years
  • Benefits:Tax relief on some
    qualifying investments
  • Flexibility:HIGH
  • History:Flat last 10 years
  • Annual Returns:Avg 5%
  • Transaction costs:1%+
  • Transparency:LOW
  • Specialism:LOW

    • Lots of potential for growth
    • Can align investments with personal values
    • Seen as the riskiest asset class

Metals

Minimum Investment: £1,000
  • Risk:MEDIUM
  • Term:10 Years
  • Benefits:Some gold products
    VAT free
  • Flexibility:MEDIUM
  • History:Up 190% last 10 years
    (Gold)
  • Annual Returns:Avg 25%
  • Transaction costs:0.3%-15%
    depending on
    asset type
  • Transparency:MEDIUM
  • Specialism:MEDIUM

    • Hedge against inflation
    • Intrinsic value despite economic conditions
    • Long term perspective vital

Futures

Minimum Investment: £10,000
  • Risk:HIGH
  • Term:Varies on asset
  • Benefits:Considered a CGT
    therefore subject to
    some tax relief
  • Flexibility:HIGH
  • History:Up 14% last 10 years
  • Annual Returns:Avg 11%
  • Transaction costs:Varies on asset
  • Transparency:MEDIUM
  • Specialism:LOW

    • Useful for hedging against losses in a volatile market
    • Finite and enjoyable product
    • Lock limits': Futures markets impose limit moves to prevent one-day collapses and to contain volatility

Property

Minimum Investment: 5% of Value
  • Risk:LOW
  • Term:N/A
  • Benefits:Several tax deductible
    benefits for
    landlords
  • Flexibility:LOW
  • History:Up 10% last 10 years
  • Annual Returns:Avg 9%
  • Transaction costs:1%-5% of
    property value
  • Transparency:HIGH
  • Specialism:MEDIUM

    • Buy-to-let can provide good regular income
    • Subject to value fluctuations
    • Time consuming

Collectibles

Minimum Investment: £1,000
  • Risk:MEDIUM
  • Term:10 Years
  • Benefits:Tax Free Investment
  • Flexibility:LOW
  • History:Up 8% last 10 years
  • Annual Returns:Avg 4%
  • Transaction costs:Up to 25%
  • Transparency:HIGH
  • Specialism:HIGH

    • Enjoyable asset
    • Subject to value fluctuations
    • Beware tricksters

Currency

Minimum Investment: £500
  • Risk:HIGH
  • Term:1 Day - 3 years
  • Benefits:N/A
  • Flexibility:HIGH
  • History:Currency dependant
  • Annual Returns:Avg 30%
  • Transaction costs:0%
  • Transparency:HIGH
  • Specialism:HIGH

    • Fast-moving market
    • Large return potential
    • Notoriously complex

Oil

Minimum Investment: £1,000
  • Risk:HIGH
  • Term:5 Years
  • Benefits:N/A
  • Flexibility:HIGH
  • History:Down 40% last 10 years
  • Annual Returns:Avg 10%
  • Transaction costs:0.25% - 5%
  • Transparency:MEDIUM
  • Specialism:LOW

    • Value likely to rise in short to mid term
    • Well-established market
    • Some ethical issues

Funds

Minimum Investment: £1,000
  • Risk:MEDIUM
  • Term:10 Years
  • Benefits:Up to £15,240 tax free
    within ISA wrapper
  • Flexibility:MEDIUM
  • History:Up 100% last 10 years
  • Annual Returns:Avg 12%
  • Transaction costs:Around 1%
  • Transparency:LOW
  • Specialism:LOW

    • Easy to understand
    • Little hands-on input required
    • Potential ROI is passive/active fund related

 

 

PART 5: Fine wine – What makes it a good investment?

 

Despite the economic tumult of recent times, the fine wine market has demonstrated consistent growth over the last 50 years – and growth overall during the last two centuries. Crucially, fine wine managed to escape the pressure put on other financial markets towards the end of 2015 and even outperformed gold, copper, the FTSE 100 and the S&P 500, making it the most profitable investment available. Benefits of investing in fine wine include:

 

  • High profitability
  • High stability
  • Continuous growth
  • Tax efficiency – it isn’t liable for Capital Gains
  • Efficient diversification asset
  • Protection against inflation
  • Fine wine is a tangible, personally-owned asset
  • Enjoyment of collecting
  • Finding Cult and Rare Wines that make the best investments

 

PART 6: Conclusion – What alternative investment is best for you?

 

If the financial crisis of the mid- to late-2000s taught us anything, it’s that traditional stock, cash and bond investing is not always enough to protect investors from potentially devastating losses. And risk aside, while these instruments may accomplish basic investment objectives, there are many opportunities for better returns when you look outside the box.

Throughout this report we’ve detailed a wide variety of alternative investments, their pros and their cons, plus comparisons for each. But how do you know which one is right for you?

Consider your appetite for risk. This report outlines how susceptible each investment type is to volatility, and what that might mean for your investments. Are you prepared to weather a few storms for potentially large returns? Or are you prepared to play the long game and watch your investment grow slowly but surely over time?

You need also consider how ‘hands-on’ you want to be with your alternative investment. If you’re looking to invest in a particularly complex area, are you prepared to give the reins to an asset manager and trust that they’re fulfilling your investment goals? Or perhaps you’d rather build your investment around a genuine interest in the asset in question. Building a physical collection of tangible, valuable objects can be extremely satisfying, not to mention enjoyable.

As with any investment, it’s important to do your homework, but in the case of many alternative investments, some specialist knowledge on the specific asset is often needed. Therefore it’s important that would-be investors have a reputable broker or investment company on their side with demonstrable success in their asset class arena, which are happy to work with you to identify your ideal investment solutions.

Use the information provided in this report to consider how each investment type fits with your specific objectives, and remember that diversification is crucial – every portfolio will benefit from an alternative investment instrument.

 

PART 7: Frequently Asked Questions

 

Why should I consider investing money?

Answer:

Interest rates are at an all time low, and standard savings accounts offer very little in terms of returns. Investing in alternatives is an opportunity to grow your money more significantly in the long term, providing a nest egg for retirement investing or a lump sum for kids in a way traditional savings accounts can’t.

 

What are the best ways to invest money?

Answer:

There are numerous ways to invest, but what to invest in comes down to your personal circumstances. How much do you have to invest? What sort of returns do you want? What’s your appetite for risk? There are investment solutions out there for everyone, so take some time to consider your individual requirements.

 

Where is the best place to invest money?

Answer:

Again, where to invest your money depends a great deal on your personal financial profile. It can be helpful to seek the advice of an investment group or advisor, who will be able to discuss the smartest investment ideas for you and help you create the best investment plan for your needs.

 

What are tax-free investments?

Answer:

Everyone has a tax-free savings allowance of £15,240, but once your monetary savings surpass this, you’ll have to pay tax on your investments, much like you pay income tax. Some types of investments are advantaged in that, because of their very nature, they are not liable for tax. Wine, art and collectibles, for example, may appreciate in value but because they are not monetary in nature you won’t have to pay tax on them.

 

Can I invest for the short term?

Answer:

Effective investment planning is a long term endeavour. Unless you’re willing to accept extremely high levels of risk for potentially high returns in the short term (and potentially high losses), you should be prepared to accept an investment term of at least five years.

 

UPDATE: Fine Wine Investment After Brexit

 

The shock of Brexit has not dampened the positive wine market sentiment in 2016, in fact most of the main players in London noted record sales by volume and value in June. For the week following the Brexit announcement, Cult Wines’ trade sales noted a 106% increase on the weekly average for the first three weeks of June.

This trend has continued in July, with an influx in demand from the US and Asia inspired by favourable exchange rates. The Brexit outcome has magnified what can often be an underrepresented topic of conversation amongst the fine wine community : the ever changing colour of your money. The fine wine market is denominated in Sterling*, and when the GBP weakens against the USD and HKD (HKD linked), there is an influx of enquiries and orders from undoubtedly two of the largest secondary markets for Old World fine wine, in particular Bordeaux and Burgundy. The recent movements have seen both currencies move dramatically against the sterling, with HKD seeing a weekly low of 10:25 : 1 GBP, against the pre-Brexit rate of 11.50, and USD 1.32: 1 GBP compared with 1.5.

The buying opportunity is discerning, for example a case (12x75cl) Mouton Rothschild 2009 costing £5,000.00 becomes 10.85% cheaper than this time last month for HKD buyers and 11.2% more attractive for those based in the U.S. The net result is for many merchants to push up prices or even in some cases de-list stock, as purchase environment has become 10% more expensive with GBP:EUR rate. This all has the obvious effect of driving prices up in the short term and has emboldened the previous year’s challenge of acquiring prime back vintage Bordeaux stock. The conundrum of international investors and consumers is do you buy now? Or do you take a more bearish view on GBP and wait for the assets to become even cheaper? Given the focused nature of buying and the supply constraints, those who are prepared to play the waiting game may find out they have failed to take advantage of value areas of the market.

 

*Liv-ex value in GBP explanation

 

‘’Obviously fine wine is mostly released onto the primary market in euros, but with the majority of end consumers paying either pounds or dollars (or in emerging markets, currencies linked to the dollar). It seems that the euro price quickly loses its relevance in the secondary market.

It may change, of course, but we suspect that because London remains the global hub for the secondary market in fine wines, global trade prices are still benchmarked against the UK market. As such, sterling remains the best base currency for the Liv-ex 100 Fine Wine Index’’

 

Even the most sanguine of fund managers, recognises there is a very strong possibility of turbulence in the stock market and this has revived the debate amongst investors internationally concerning the importance of diversification and asset allocation. The persistent volatility of the markets over the past 12 months has led to a purge from ‘paper’ and a move towards ‘safe havens’ – this shift in investor sentiment has been amplified post-Brexit. An allocation towards fine wine provides investors with a number of guarding characteristics, and the concept of spreading risk is clearly a sound strategy as Brexit seems to have pushed global uncertainty to a new high, stimulating the scope and attractiveness of alternative sectors such as Fine Wine. Our advice; stay diversified.

 

Wine Market Performance

 

The Liv-ex FW 50 now stands 5% higher than it did a month ago, posting a YTD gain of 12.2% whilst the Liv-ex FW 100 is up 9% YTD. We do not believe that Brexit has changed the fundamental view that key areas of the wine market remain undervalued, and post-correction (2011-2015) the recovery has been accelerated as a result of the 23rd June judgement. In most other markets, there are massive splits over the impact of Brexit, however most in our market ought not to be deterred as wine prices remain well below the long term trend. All major market indices in 2016 are tracking between 3% – 12.2% YTD, the major indices LXFW 50 and 100 are 42% and 38% off the market peak in mid-2011. We’ve experienced the most positive 7 months for wine investors for the last 5 years, and as long as investors stick to the principals of building a diversified portfolio in quality, we believe that with the vast decreases we’ve seen in available stock for key vintages across all regions, the sustainability and market sentiment will continue to support the market moving forward.

 

 

To discuss your Alternative Investment strategies and goals or to learn more about Fine Wine Investment please call a member of our helpful investment team on +44 (0)20 8332 9386, contact us using our Contact Page or Download our informative Investment Guides using the form on this page.