Strange things are happening in the world of finance and investments. The recent run of economic chaos shows no sign of coming to a close. We have seen the collapse of huge financial institutions that nobody could have ever predicted. Many ‘blue chip’ investment opportunities that were always considered safe have now turned out not to be so. Investors are running scared and looking out for safer places to invest their hard earned money.
There is advice everywhere and although this advice is generally based on good knowledge and experience of the markets, the truth is that, as we head into previously uncharted financial territory, nobody really knows what’s coming next. Maybe the soundest piece of advice that we can give you on these pages is simply to hedge your bets. Putting all of your eggs in one basket has always been a bad strategy. Doing so at this time would be like putting them all in one basket and asking someone with greasy fingers to hold it for you.
The strategy that many investors are adopting in the light of the downturn is to spread their investments between some firm favourites, such as government bonds and high interest accounts, and alternative investments.
Wikipedia defines alternative investments as
“an investment product other than the traditional investments of stocks, bonds, cash, or property. The term is a relatively loose one and includes tangible assets such as art, wine, antiques, coins, or stamps and some financial assets such as commodities, private equity, hedge funds, venture capital, and financial derivatives.”
These pages will take a closer look at some of the alternative investment opportunities that are available. We are not suggesting, recommending or advising anything. Even when we offer a link to a private company’s website, this is not an endorsement of, or recommendation for, their services or products. It is simply to supply you with more information. For that is, and always has been, the best thing for the would be investor: more information. If you decide that one of the alternative investments mentioned here is of interest to you, don’t just take our word for it. Do your research and gather as much information as you can. Read up about the investment sector as well as the companies involved. Ask friends and colleagues who may have made similar investments or who have a good understanding of the market. Ask financial advisors to explain things to you in more clarity. Ask the companies themselves what their business is about and what sort of guarantees they can make.
Firstly we introduce the ‘green’ and ‘ethical investments’ and follow on to ‘other alternative investment’ opportunities. We hope that some of this information inspires you to take a closer look at that particular sector.
Alternative – green investments
Green investments are investments that have a beneficial environmental effect. Currently the most common are investments into renewable energy which have been grabbing headlines as our landscape fills up with wind turbines and the roofs of our towns are now sprouting photo voltaic solar panels. These investments include more specifically, carbon trading, solar, feed-in tariff (FIT), renewable energies and green oil. Learn more about specific green investments.
Alternative – ethical investments
Ethical Investments are, well…. they are investments that are ethical. With globalisation and the information revolution has come an increasing awareness of social and environmental issues. Many investors now demand to know where their money is going and how it is being spent. Making ethical investments can leave the investor with a clear conscience and make a positive difference in the world. Forestry, timber, teak and bamboo are at the forefront of ethical investing. Learn more about specific ethical investments.
Other alternative investments
We love Africa and investment there can take on many different forms, from the ethical to the not so ethical. Invest in micro money lending to women in obscure villages or the big mining companies like Rio Tinto who are currently pumping £22 billion into Mozambique over the next five years. More information about investing in Africa.
Classic car investment
Classic car investments are normally considered as only suitable for classic car enthusiasts. But is that necessarily the case? More information on classic car investment.
Diamonds are close to everyone’s heart and are the ultimate symbol of wealth. But are they worth investing in? More information on diamond investment.
People have invested in gold for thousands of years. Being an investment vehicle that investors traditionally turn to in times of crisis, gold has recently become very popular, sending prices through the roof. More information on investing in gold.
Hotel room investment
Investing in hotel rooms has been a fairly recent phenomenon and one that has attracted lots of publicity. Hotel room investment offers the ultimate in passive buy-to-let investments and yet it has not been plain sailing for many investors. More information about hotel room investment.
Student accommodation investment
With student numbers rising and the private buy-to-let market struggling to meet demand, investing in student accommodation has become a much talked about market and one that is worth finding out more about. More information about student accommodation investment.
Whisky (Scotch whisky) investment
Whisky, and maybe more specifically malt whisky, has become an excellent investment vehicle that is enjoying a resurgence in popularity with the opening of the Asian and South American markets. More information about investing in whisky.
Investing in wine used to be the domain of the fabulously wealthy. Now the man in the street can also get a slice of this pie. Even if he doesn’t have a seller it is possible to invest in wine funds that will do the choosing and storing for you. More information on how to invest in wine.
Alternative investment – categories
Investing your money offshore can make a huge difference to your tax situation and is a path followed by many investors around the world. More information on offshore investments.
Indirectly this is probably the ultimate motivation behind most investments. We none of us want to get to retirement age with no financial security to support us during the twilight years. More information on retirement investments.
High growth investments
High growth investments only look at growth, they are not concerned with longevity or yearly payments just simply an investment stock that increases in value quickly. This type of investment is usually for a short time and might fall in value as quickly as it rose. These are risky investments that we do not cover. More information on high growth investments.
High yield investments
Achieving a high yield from your investment means making a choice between risks and potential returns. More information on high yield investments.
High return investments
High return investments are what every investor is looking for. A good return on your investment is the goal of investing. But high returns also mean high risks. More information on high return investments.
Short term investments
Investing in the short term can bring instant rewards but sometimes with lower returns. Short term investments are suitable for investors who might need access to their capital at short notice. More information on short term investments.
Long term investments
Long term investments can suit investors who have disposable cash available to tuck away for long time periods. These investments are often characterised by higher risks but also carry the potential for higher returns. More information on long term investments.
Before making an investment you will need to ask yourself some questions. Investments are all about assessing risk and you will need to be comfortable with your investment so you will also need to assess the risks involved with your investment as well as your own level of risk aversion or risk tolerance.
The definition of investment risk is “the standard deviation of the historical returns or average returns for a specific investment.” This means that, by finding the average return for an investment over a specific time frame, you can determine how much of a return you can reasonably expect that investment to deliver. The standard deviation from that average, which is basically how volatile the investment has been during that specific time frame, tells you how much risk is involved with the investment.
To make matters even more complicated you will need to take into account different time frames and include your own personal investment horizon into your calculations. That is, risk will vary between short term and long term investments.
The most common way to evaluate how risky an investment is going to be is to compare it to something that is not considered to be as risky, such as a government bond.
This is one way of calculating risk as compared to a government bond:
(Estimated return on investment %) – (Return on government bond %) = Risk Premium
To read about calculating investment risks in more detail follow this link to the Investopedia article called, Calculating the Equity Risk Premium.
As well as assessing the risk of your potential investment you will need to take a closer look at your own risk tolerance. As a rule, your risk tolerance can be defined by four simple characteristics:
- Financial Goals
In general the younger an investor is, the more time they will have to invest in the markets. This converts into more opportunities to recoup any losses incurred early on in the process of building an investment portfolio. The outcome of this is that younger people can afford to take more risks. If an investor is approaching retirement age and investing with that in mind, there will be less room for error so a low risk strategy would be more appropriate.
Identifying your financial goals will also help you assess your risk tolerance. Really it’s a question of how important, or necessary they are. Your children’s education or being able to pay your own mortgage can be considered more imperative than a second holiday home or that house extension you quite fancied. Obviously the more necessary and important the goals, the lower your tolerance of risk should be. Some people are just playing at investing whereas others might really need the money.
Considering your income is common sense really. Maybe an easier way of asking the question would be “How much capital can you afford to invest?” An investment that is just a drop in the ocean for one investor might be equal to more than the complete life savings of another investor. It is important to consider what would happen if you lost all of your investment capital. Could you still pay your mortgage and put food on the table?
Never invest more than you can afford to lose.
Experience isn’t just a question of how long you have been actively investing. It is also about how familiar you are with specific investment vehicles. If you are considering investing in a sector with which you have no experience at all, then your risk tolerance should be fairly low. At least until you get a feel for the market and start to feel familiar with how it works.
If you’re interested in diversifying your investments, or investing for the first time, we hope you will find these pages both useful and interesting.