In times of geopolitical tension and turbulent markets, it’s wise to have a truly diversified investment portfolio. Buying and selling stocks and mutual funds can only get you so far, as traditional asset classes are typically susceptible to stock market volatility during periods of economic recession. To minimise portfolio’s risk, savvy investors look to diversify across a number of traditional and alternative investments.
Here we look at the key trends in alternative investments that can help provide a safe haven during uncertain economic times.
But what are alternative investments?
“Alternative Investments” is a broad term catching all investments outside the scope of the traditional investment classes of public stocks, bonds and cash. They are typically characterised by their relative illiquidity and low correlation with stock market performance, making alternatives a long-term investment option that can help act as a buffer during economic decline.
Alternative Investments to watch
Consider how these alternative investments can help you meet your financial goals.
1. Real Estate
One of the most popular alternative investments, 90% of the world’s millionaires over the last two centuries have made their wealth from real estate. In 2020, real estate remains a relatively safe alternative investment vehicle that continues to perform during economic downturns. Even with sharp price corrections, there has been a sustained increase in real house prices since World War II. Price corrections themselves have been comparatively rare and modest, with a price decline of 20% or more only occurring in about 7% of market dips.
While investing in real estate does require skill and patience, most real estate investments can provide ongoing income if you choose to manage and rent out the property.
In addition to traditional real estate investing, there is the option of crowdfunded real estate investments to help expand their investment portfolios. Crowdfunded real estate investments can remove much of the frustration of managing the property and allow anyone, even those with a relatively small appetite for investments, to invest in real estate.
2. Gold and Precious Metals
The traditional safe haven assets, precious metals such as gold and silver typically serve as the backing for physical currencies. Investing in gold has several key advantages for investors:
The value of gold often increases when other investments decrease. The same factors that can cause traditional investments, including stocks and bonds, to decrease can also cause gold to increase.
Gold provides an excellent hedge against inflation. Most of the time, when prices increase on most goods and services, the value of gold increases along with them–which makes it an excellent way to protect yourself against inflation.
Gold has become increasingly desirable. The more people want to add gold to their financial portfolios, the greater its value–and, therefore, the greater the benefit it can provide for you.
Bitcoin was created during the 2008 global financial crisis as a response to the instability of traditional banking institutions. Since then, Bitcoin has had a respectable track record in the face of past global turmoil. The historical trend is that Bitcoin generally benefits from periods of economic uncertainty, hyperinflation, and geopolitical crises. While the global fallout of COVID-19 has led to Bitcoin trading in tandem with the stock markets despite predictions, it is generally expected to recover and this week has held its ground as other markets have continued to drop around it.
With digital currencies becoming increasingly commonplace and regulatory frameworks more accepting of cryptocurrencies, the market for Bitcoin will also likely grow and mature. Even for those who dislike high volatility, a conservative cryptocurrency strategy could set savvy investors up for big long term gains.
4. Peer-to-Peer Lending
Peer-to-peer lending allows lenders to provide loans directly to the people that need them. Instead of going through a financial institution, borrowers can connect directly with investors who are willing to lend them those funds in return for repayment over time. Peer-to-peer lending can generate greater-than-average gains for investors, compensating for what is often a higher risk of borrower defaults.
Typically, peer-to-peer lending takes place via online platforms, where prospective lenders and borrowers are matched with one another (not unlike a dating app). Investors choose the amount they want to put into their accounts. The website or platform that provides the peer-to-peer lending service then spreads those funds out into loans to specific individuals and entities, usually based on the level of risk the investor is willing to accept and the duration of the loan. The companies that run the platforms then manage the logistics of the transaction (e.g., sending those payments back to the lenders and, when necessary, pursuing collections against a borrower who has failed to repay the loan).
Peer-to-peer lending, however, is not without its risks. In some cases, borrowers may fail to pay back their loans, which can leave the investor floundering with little or no recourse. If the borrower files for bankruptcy, the investor may never fully recoup the value of the loan. Exercising care and diversifying among safe and risky borrowers, therefore, is critical when participating in peer-to-peer lending.
Many investors love the idea of investing in collectibles. They get to know the market, discover what specific items are worth, and then collect them. Later, if you need to recoup funds, you can sell those collectibles–often for substantially more than you initially paid. Not only that, but collectibles are also often highly tangible investments that you can display in your home. People may choose to invest in art, cars, antiques, and a wide range of other items that allow them to raise financial value while enjoying these items. When investing in collectibles, there are several things that it’s important to consider:
Collectible values can change quickly. Collectible markets can be extremely volatile. While some collectibles are more likely to increase in value than to decrease, it’s important to do your research before investing heavily.
Collectibles can prove difficult to liquidate. In order to effectively liquidate a collectible item, you must know where to sell it in order to have the best chance of recouping the value you’ve already put in, much less increasing your funds through your investment.
You’ll need to do extensive research to be involved in collectible investing. In order to understand the values and risks associated with specific investments, you will need extensive knowledge of that specific market, including how to spot fakes and counterfeit products.
6. Angel Investing
Angel investors provide funding to startups in their initial days, often before traditional investors are willing to take a risk on those startups. Successful angel investments can have immense financial pay-offs: if the startup succeeds, you may watch your investment soar and enjoy immense returns over the years. Angel investors often receive a higher return on their investment than investors who wait until later rounds of fundraising to buy in with a specific startup.
Unfortunately, startups often prove highly volatile when it comes to investment opportunities. More than 50% of startups fail–and angel investors who chose to invest in those startups may lose the money they put into the startup.
This year, you may already be considering how your investment efforts will support your overall financial standing. By choosing the right investment methods, you can help grow your financial portfolio and make it easier for you to prepare for the future. Allocating at least a small portion of your investments to alternative investments like cryptocurrencies, gold, or real estate can help support your financial portfolio, prevent you from focusing too narrowly on a single investment strategy, and ultimately improve your financial standing.
How we can help.
At Origin X Legal, our global investment funds team can provide pragmatic and trusted advice on all funds and across all assets. If you’d like to know more, contact us on [email protected] Let us navigate the regulations, so you can disrupt the future without reservation.