The phrase ‘alternative investments’ might sound like another term to add to the already lengthy list of investing jargon. But in fact, it’s the method in which many people get their start in investing — albeit perhaps unwittingly.
So how could someone unwittingly get their start in the world of investing?
It’s because investments can take many forms, and they’re not always obvious.
Keep reading to find out!
The Speed Read:
1. Investing involves the deliberate allocation of resources to achieve a result, and alternative investments might aim for the growth of your money or something more philanthropic.
2. Alternative investments you can make to grow your money, such as property and collectibles, work on the traditional investment principles of supply and demand.
3. Some alternative investments are made expressly to have a positive impact on the world, as either as their primary or secondary purpose.
While stocks, shares, bonds, funds and ETFs are thought of as traditional profit-focussed investments, there are other alternative investments you might already be making that follow similar principles.
Investopedia defines investing as “the act of allocating resources, usually money, with the expectation of generating an income or profit”. But the Cambridge Dictionary has a broader definition: “to put money or effort into something to make a profit or achieve a result”.
The second definition alludes to the fact that a monetary profit is not always the primary aim of an investor.
Alternative investment for growth
For most, the primary aim of buying a first property is to provide somewhere nice to live, rather a wise investment that will increase in value over time.
Because property is such a big investment, it’s commonly bought using a mortgage, which is essentially a large debt that you chip away at over time. As you pay off your mortgage, the equity you hold in your property increases.
The amount of money you will get if you sell (or ‘liquidate’) your asset.
Over time, it’s common to trade up, selling one home for another. Perhaps you want to be closer to your work, need more room for a growing family or crave outdoor space. In order to do this, the property needs to increase in value over time, which property generally does.
You can see above the increase in the average house price in the UK. Despite the most recent two years being affected by the uncertainty of Brexit, between 2007 and 2020 there was a 30% increase in prices.
Property becomes a particularly good investment if you manage to buy a second, third or even fourth property. As well as a profit when you come to sell, a residential or commercial property can provide an income through rental returns — the equivalent in traditional investment terms of the regular dividend payment you receive from well-performing stocks.
It’s when you remove your personal requirements from a property investment (it’s got to be close to good schools, I need four bedrooms, I don’t want to do any work to it, etc) that it becomes easier to think about property as an investment. At that point, you are able to invest specifically for the potential it has to increase in value over time, viewing the property as a financial asset rather than a home.
Similar to property, investing in things like art, memorabilia and antiques allows you to enjoy your investment while hopefully also seeing it grow in value. It’s a particularly popular option when return rates on savings accounts are so low — a stunning piece of art is likely to bring more joy than checking the balance of a savings account.
As well as providing you with something to enjoy, the aim of this type of alternative investment is for its value to grow over time — but it takes a good eye to pick the right item.
Paul Merrick, a collectables expert, explained the collectibles that are gaining in popularity, saying: “A big growth area is the period that appeals to Generation X – those who grew up in the 1970s, 80s and early 90s. Kurt Cobain and Steve Jobs’ autographs, Star Wars figures and vintage video games are popular. This generation — now in their 40s and 50s — have more disposable income and are looking back fondly on their youth.”
When it comes to very rare items or works of art, the value is less predictable. You will get a higher sale price if someone falls in love with the item, or it’s exactly what they’ve spent years searching for. It’s just as much about finding the right buyer as selling at the right time, because as the saying goes, an investment is “only worth what someone else will pay for it”.
The chart above shows the returns on some of the most popular collectibles in the UK over the past 117 years, compared to traditional investments. Global equities, or stocks, still performed the best. But it was stamps, violins and art that proved to be almost as worthwhile, particularly for anyone wanting to get some enjoyment from their investment. (Wine drew the second largest returns, but that type of investment requires serious self control to leave that nice bottle of red unopened.)
Strictly speaking, by its financial definition a pension isn’t an alternative investment. But many people don’t realise that a pension is a traditional investment, seeing it just as a savings account for putting aside money for retirement.
It’s worth discussing because it’s an investment type that shows that even if you don’t think of yourself as an investor, you almost certainly are.
Whether you have a company or private pension, your money is normally being invested in all of the assets you would normally regard as traditional, including stocks, ESGs, funds, bonds, and gold.
A pension might be administered by a government, employer or you may directly be contributing to a private pension (particularly if you’re self-employed). Whichever it is, the aim is to provide you with enough money to enjoy a good standard of living after your retirement.
The most common type is a funded pension. Here, your contributions are invested in stocks and other assets, with the goal of increasing the size of your pension pot by the time retirement age comes around. For most, the final size of that pot will dictate the size of your monthly pension amount when you come to start withdrawing from it.
That means that the risk sits with you, because if those investments don’t pay off, there will simply be less money in the pot for you to benefit from over the course of your retirement.
Many people are unaware of the portfolio of investments that make up their pension. But much like in traditional investing, this is changing, with an increasing number of people choosing ethical pensions. These promise to only invest your money in ethical/responsible/sustainable funds — although the definition of ethical, responsible and sustainable in the finance world depends very much on who’s doing the defining.
While not exactly mass market, household pension names such as Aviva and Zurich both have ethical funds you can choose to invest your pension money in. And in the same way ESG investing has become more common as millennials take the financial reins, it’s possible that the popularity of these pensions may increase as this generation starts thinking more about retirement.
Alternative investments for impact
Every pound, euro or dollar you invest has an impact. When you buy a product or service, you are essentially helping that company to continue to do business, whether that’s a fossil fuel reliant airline or a solar power producing energy company.
With traditional impact investing, the aim is to have a positive impact on the world alongside wealth accumulation. This type of investment uses rigorous impact analysis to decide which companies to invest in, along with the more traditional financial analysis.
But there are investments that you can make that prioritise impact over growth — whether that’s philanthropic impact or just helping to bring something you want into the world.
Crowdfunding allows those with a product to get investment for it before it’s produced. The difference between that and venture capital investment is that the aim is to get lots of smaller investments from the public, rather than several large investments from professional investors.
As a crowdfunding investor you’ll receive some sort of reward in exchange for your money, although this won’t take the form of a cash return. If you contribute just a few euros, you might get nothing more than the appreciation of the fundraiser. But it’s common for people to put in more money to receive one of the first products off the production line, a credit in the now-funded movie or an invite to meet the founder.
For fundraisers, it’s a great way of proving that there is demand for that product. In this way, it’s similar to climate impact investing, where your investment sends the message that you want to see more companies tackle their carbon emissions.
LastObject is one company that has adopted the crowdfunding model to prove the demand for several new products, which are now available online. They’re a sustainably-focused company that designs and produces ‘last’ items, with the idea being that it’s the last one of those things you’ll need to buy. Their most recent product, the LastTissue, received €705,000 of funding (their initial goal was €11,000).
We spoke to LastObject to find out why crowdfunding worked so well for them, and this is what they had to say:
Consumers who purchase through crowdfunding are looking for something new, but they are also looking for something that solves a problem or makes their lives easier. Interest in environmental projects is growing in general, not just in crowdfunding.
Even in traditional investing, the aim is not always to grow your money.
For instance, in the case of cash and gold, investors use them to store their wealth, protecting it from the fluctuations that the stock market is subject to.
Microloans provide a similar reward, but that’s not their primary purpose.
By loaning money to people without access to traditional bank or VC funding, often in developing countries, you can help them to start a business. After an agreed amount of time, your loan is returned to you, and you can decide whether to reinvest with another project or to withdraw your money.
There is no interest rate attached to the loan and you don’t get dividends, but your philanthropy does enable individuals and communities to build sustainable businesses, by providing the initial capital that every new business requires.
CEO Neville Crawley says: “You have money in your Wells Fargo account.... We move that money to somewhere else in the world and it’s worth 30-40% more. It can change a life, just on a very basic level: someone getting a motorbike, getting a cow, getting an operation. It can do something really truly meaningful and it’s the exact same money.”
Lend money, so that other people can make money. Isn’t this the kind of mentality that makes the world a better place? We’d say so.
Investing has a reputation for being complicated and difficult to get into. But that isn’t the case, and in fact, you may already be using investing principles in your financial life.
Whether it’s your pension, property or something else that you’ve bought with the intention of reselling for more than you paid at a later date, the focus on growth is a traditional investor model.
In contrast, both crowdfunding and microloans sit at the philanthropic end of the investing continuum.
If you’re looking for growth in addition to impact, it’s worth considering impact investing. This type of investing considers the amount of good that a company does, alongside the profit it makes. It requires rigorous analysis to prove the exact impact that your invested money has.