Alternative Investments

Most investments are grouped into the three traditional asset classes of stocks, bonds, and cash or cash equivalents.  

Wealthier investors may look to more sophisticated investments such as peer-to-peer lending, private equity and hedging strategies.

If you don’t have the required high minimums there are other alternative investments such as collectibles, art, fine wines, and antiques.  All these operate far differently and require more investigation, expertise and each has specific risks.

Fine 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 auction of forty-years worth of Star Wars memorabilia held a year or so ago, there are plenty of people sitting on practically worthless collections of Precious Moments, collector plates and bottles.

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. Buy from a reputable dealer and do your homework.  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.

There are always articles about the thousands of dollars you can get for toys from the 60’s and 70’s.  But if you look through sites like Craig’s List, you’ll see hundreds of similar items which leads me to believe they’re not a profitable as you might think.  You would almost have to have a pristine toy in the original box with the receipt attached. 

What loving parent would deny their child something they’ve been begging for just so they can cash in decades down the road?  Knowing my kids, they would have found the hidden toys to play with anyway.

There’s nothing wrong with spending money on collectibles, but this category should really be regarded as a hobby to enjoy – the thrill of the hunt and enjoyment of possession and all that – don’t fool yourself into thinking that they’re investments. 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.  Other coins and commemorative sets fall under the collectible category.

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 or precious metals, you can purchase mutual funds and ETFs that own them. You can also invest in mining stocks. Be aware that these funds are very volatile.

Consider usage and ownership costs

Many collectibles, fine art, wine and other alternative investments require maintenance costs while you own them.  To preserve the value of your collection, or be in a desirable saleable condition, you must maintain them in proper storage conditions to protect them from damage. 

Any valuable collection must also be insured with an add-on rider for specific coverage.    Have your items appraised by a certified expert.   It’s also important to account for their value in your estate plans.

When you decide to sell consider commissions and fees you will have to pay to an auction house or broker.

Don’t forget tax consequences.  The sale may be subject to capital gains tax.

The bottom line

The average individual investor has about 5% of their assets in alternative investments.  They can produce another potential source of wealth and income.

However, before committing money to alternative investments, you should have a well diversified core portfolio.

You need to take the time to thoroughly investigate and become knowledgeable about your options. They may be hard to sell or incur hefty commissions.  Also, consider ownership and maintenance costs of physical items.

And, above all, consider the risks.

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