Most investments are grouped into the three traditional asset classes of stocks, bonds, and cash or cash equivalents. There are also alternative investments such as real estate, commodities, collectibles, art, and antiques which operate far differently and require more investigation, expertise and each has specific risks.
Building Your Wealth with Alternative Investments
Real estate in the form of rental properties can claim quite a bit of your time as well as ongoing costs. Unless you hire a property manager (which cuts into your profits) you will have ongoing work to find suitable tenants, collect rent, respond to complaints and deal with repairs. A good resource if you’re interested in buying a rental property is Rent Smart by Margot Bai.
Another way to invest in real estate is by buying Real Estate Investment Trusts (REITs). An individual REIT usually focuses on similar properties. They own and operate any variety of real estate: industrial, retail and office parks, hotels, retirement residences, apartment complexes, and so on.
REIT ETFs may combine various properties. With this approach you can include real estate into your investment portfolio without the obligations of owning actual properties.
Art, antiques, and collectibles
Many of us fantasize about buying something at a garage sale and finding that the item is worth many times what we paid. But, for every lucrative collection, such as the recent auction of forty-years worth of Star Wars memorabilia, there are plenty of people sitting on hundreds of practically worthless Beanie Babies.
The collectible, art, and antiques market can be extremely fickle and demand can change dramatically. A great deal of expertise is required to evaluate unique objects and the experts don’t always agree. Plus, there are very good fakes around.
Art and antique sales are thriving, with buyers eager to own something solid and beautiful, and they are willing to part with some serious cash. But it’s also extremely risky and you need a lot of knowledge. It’s hard to predict future value of anything so proceed with caution.
I like the Antiques Roadshow episodes where they show a clip from an old show, then place a current value on the item. A significant number have either stayed flat or even lost value, with very few showing spectacular increases.
This category should really be regarded as a hobby to enjoy – the thrill of the hunt and enjoyment of possession and all that – not as an investment. If you actually make a profit, consider yourself lucky.
Gold, Precious Metals, and Gems
You can invest in gold, precious metals and gems in two ways: by owning the physical items, and by speculating on prices through investment instruments.
Gold and gems have traditionally been thought of as a hedge against disaster, but generally, gold tracks inflation. You can buy bars, wafers and coins such as the Canadian Maple Leaf which all are .9999 pure gold.
For those of us who don’t believe the world is ending soon, having gems and precious metals in the form of jewelry is probably more enjoyable. However, the value of these items depends more on artistry and fashion than simply on the weight of the metal or size and quality of the gems.
If you’re just speculating on the price of gold, you can purchase mutual funds and ETFs that own gold. You can also invest in mining stocks. Be aware that these funds are very volatile.
In addition to gold and other precious metals, commodities also include goods such as oil, basic metals, forest products, and crops. The commodity itself isn’t traded. Instead, a futures contract is used, which offers to buy or sell a defined quantity at a certain price at a specified future date.
Futures contracts are highly risky. Often the companies that produce the commodities are included in many stock funds, or choose a mutual funds or ETF that invests in commodity stocks.
Before committing money to alternative investments, you should have a savings plan in place, be contributing regularly to retirement savings, and be well diversified in your core portfolio.
You need to take the time to thoroughly investigate and become knowledgeable about your options. Consider ownership and maintenance costs of physical items. Any valuable collection must be insured with an add-on rider for specific coverage.
And, above all, consider the risks.