Tuesday, 10 April 2012

Alternative Investments: Initial Thoughts

Over the Easter long weekend I had the chance to sit back and think about my investment strategy generally. I believe that while it is good to have a plan and to stick to it - it is equally as important to assess this plan as time goes on (my inability to stick to my personal expenditure cap is a good example of a plan that isn't working)

The question I pondered was whether I was limiting myself to too narrow a field of investments (that is stocks, property and fixed interest securities). Nearly every general investment book I have ever read has a chapter on what they call 'alternative' investments which tend to include things like:

  • Coins

  • Paintings / art

  • Stamps and other collectibles

  • Gold and other precious metals

While I do possess some of these (such as a stamp collection I inherited from my great grandfather) it has never been for an investment type purpose. The more I thought about these types of investments the more I became convinced that although you may get good returns on them they were inherently risky for several reasons.

  1. The return on an 'alternative' investment is totally dependent on the supply and demand situation for that product in the future. There is simply no other way of making money out of these investments. This is not the case with traditional investments - for example on a stock or property while the value in 10 years time is important, in most cases you should be receiving some sort of income (e.g. rent / dividends) in the meantime

  2. If you are investing in these items you have to be doing so full time. While I (and I imagine most people) would like to think that we are are good at appreciating a piece of art I have no special knowledge about what the demand for such a product may be in the future or where tastes are trending. Some people are blindly willing to trust valuers of reports which say what is going to be in vogue in the future but that is much like blindly trusting a broker report or hearing stock tips on the street. I have said it before but you should fully understand every investment you own.

  3. Gold and precious metal investment is a field that is very hard to get ones head around as there are so many things that impact the price of these products. If I use the example of gold - it is so hard to forecast with any accuracy the type of return you can expect from an investment in gold. Not only is the supply side hard to forecast (i.e. how many more gold deposits are there to be found) but the demand side is impacted by so many different things such as the level of hedging (which itself is impacted by general sentiment, the value of the USD etc), the level of speculation in the commodity itself, the demand for jewelery (especially out of India) and a host of other factors.

The conclusion I came to was that I am not going to make investment in these products part of my investment portfolio as there is too much uncertainty and I do not believe it is possible to get the relevant level of knowledge to invest in these products. If I buy these products they will form part of my 'personal expenditure' on collectible items that I enjoy.

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