Learn About Investing
The term ‘alternative investment’ basically means anything that isn’t a traditional asset like cash, shares, bonds or property.
And like traditional assets, people invest in these with the hope that their value will go up over time. Well-known alternative assets include things like:
- Fine art
- Fine wines
- Vintage cars
- Stamps and other collectibles
That said, what gets classed as ‘alternative’ varies and there is no agreed definition of the term.
Hedge funds are sometimes referred to as ‘alternative’ investments, even though this refers to a strategy for investing rather than the asset itself. Commodities can also be classed as ‘alternative’, but for the purposes of this series both are treated as separate topics.
Six characteristics of alternative investments
- This is very important – alternative investments are often unregulated. Regulators like the Financial Conduct Authority aim to ensure that financial products are authentic and transparent. Get into ‘alternatives’ and you don’t necessarily benefit from any such protection. If you bought a load of wine that claimed to be some fantastic vintage, but turned out to be dud, that’s your lookout.
- It may not be quick or easy to convert alternative assets back into cash. (The technical term is that they are not liquid.)
- They may require high minimum payments. Buying a Picasso won't come cheap, even if it’s a great investment.
- One advantage of alternatives can be low correlation with other assets. In other words, the value of your vintage Stratocaster guitar isn’t affected much by changes in the stock market. This can be a good way to reduce risk through diversification.
- An important consideration may also be the spin-off benefits. A guitarist can have a lot of fun playing that Stratocaster. And there’s pleasure to be had for art lovers gazing at a Picasso. Owning company stock or bonds is unlikely to provide so much fun along the way.
- Some alternative assets may be more prone to changes in fashion, for better or worse. That collection of Justin Bieber dolls you’ve been lovingly getting together could be worth a fortune in 2050...or be perfectly worthless. Only time will tell.
Are alternative investments for me?
This is a hard one to answer. History has shown us plenty of alternative investments that have greatly outstripped stock market returns, but also many that have panned out badly.
Either way, the best thing to do is be as knowledgeable as possible about what it is you’re buying and selling, otherwise you could be fleeced or disappointed.