3 Alternative Investments To Consider Besides Stocks & Bonds (And The Risk Of Investing In Them)

As the stock markets recover from the March crash, some investors could find that stocks and bonds are overvalued or desire to diversify beyond these traditional asset classes.

In this short article, we will highlight 3 alternative investments that you can consider investing in besides stocks and bonds. They are also less common asset classes, so like several new investors, you need to watch out for the risk of investing in them, instead of to just focus on the potential returns.

#1 Gold

Gold is traditionally seen as an hedge against inflation along with a store of value. It is an option to stocks and bonds as it is an asset class that individuals are familiar with. Some of us would have heard stories of methods our grandparents and ancestors sewed gold coins or jewellery into clothing seams during wartime. Gold has got the status of being a “safe haven” asset in times of volatility.

During the March market crash, gold did hold up its status as a hedge against volatility. As the stock markets dropped more than 30% from their peaks, gold only dropped 8%. By 25 June, gold has outperformed the stock markets at 9% above the point where the crash going on 19 February. In comparison, the NASDAQ is just 3% above its February peak, the S&P 500 is 10% below and the STI is 18% below. Gold is currently at its record high at close to US$1,800 an ounce or S$2,500 an ounce, as of June 2021.

While gold has its place in a diversified portfolio to reduce volatility in overall asset value, gold hasn't performed as well in the long term as stocks. Unlike stocks, gold doesn't pay dividends, while its cost may rise and fall in accordance to supply and demand, gold does not grow in dimensions or inherent value. A gold bar remains a gold bar whereas stocks increases in value because a company can grow.

Over the long run, stocks have historically outperformed gold. If you have invested in gold in 2010, your gold investment will have grown by 63% in 2021. Exactly the same investment in S&P 500 may have grown by 187%. That said, there are periods where gold has outperform the stock exchange.

In Singapore, you can invest in gold through SGX's SPDR Gold (Ticker: O87) or purchase physical gold and gold shares through UOB.

Risks: Gold may underperform compared to stocks and bonds over the long run and does not give you an income return. Which means you also can't earn compound interest on your returns.

#2 Bitcoin And Cryptocurrencies

Bitcoin and cryptocurrencies happen to be gaining mainstream attention in recent years. In simple terms, Bitcoin and cryptocurrencies are virtual or digital currencies. They do not exist in physical form like gold nor are they backed by the government like fiat currencies (the money we use daily; US dollar and Singapore dollar are fiat currencies). Each and every Bitcoin transaction is recorded in a public list called the blockchain.

Of all cryptocurrencies, Bitcoin may be the largest by market capitalisation and is the most well-known. Bitcoin functions like a digital store of value similar to gold because there is a finite quantity of Bitcoin that can be created. Many Bitcoin advocates also think that the decentralised nature of Bitcoin and cryptocurrencies may be the future of money as fiat currencies devalue through quantitative easing where central banks arbitrarily increase money supply.

However, investing in Bitcoin is highly risky as its value has fluctuated greatly. Since the start of 2021, Bitcoin value has dropped to US$4,900 and risen to above $10,000. Additionally, Bitcoin has also been hit by high-profile thefts and scandals like the theft of US$40 million from the bitcoin exchange or WireCard's missing US$2 billion. The anonymous nature of Bitcoin has also made it a medium for unsavoury activities as a result being the currency of choice for ransomware.

As Bitcoin and cryptocurrencies continue to be niche investments, it is not easy to buy or sell bitcoin. Regular banks and brokers do not offer cryptocurrencies and instead you would have to go to specialised exchanges such as Coinbase to trade or purchase Bitcoin.

Risks: Bitcoin and cryptocurrencies have high price volatility. It's not easy to enter cryptocurrency trading. The underlying technologies are not easy to understand, and it is simple to be scammed. You or even the exchange you are using may also run the risk of being hacked.

#3 Collectibles (Art work, designer handbags, watches and wine)

Collectibles are another form of niche investment. Many people declare that their designer handbags or watches are investments but is that this really true?

The key to investing in collectibles is the expertise in selecting the right pieces for investment. This is true for all forms of collectibles, including fine art, handbags, watches or wine.

In general, well-chosen collectibles do tend to hold their value, even just in times of crisis. For example, British Airways is auctioning business art collection to raise cash to deal with the fallout from pandemic. Meanwhile, some luxury brands are in fact increasing their prices. For example, Chanel has hiked the prices of their handbags by 5% to 17% during the pandemic. Sotheby's broke their online auction marketplace record with a Rolex Daytona that someone bid up to $306,378. The Liv-ex index of the 1,000 most traded fine wines was actually positive during the March market crash; a feat that even gold cannot surpass.

In general, collectibles that hold their value tend to be at the high-end of the market. Knowledge of selection of the pieces is essential in making the right investment. A wrong choice may be a costly mistake because the entry prices are steep. Additionally, it might not be easy to divest your investment. Most collectibles are sold by auction and the procedure for finding a buyer may take a couple weeks or even months.

Risks: High barriers to entry because of high capital costs and expertise necessary to make the right selections. The investment can also be relatively illiquid as you need time to find buyers in the event that you need to sell your assets. You need to be very knowledgeable in order to pick the best pieces to invest in. Otherwise, whatever you may end up paying for is only a nice bottle of wine, a nice watch or an expensive handbag, rather than an investment-grade product.

Caveat Emptor

As with all of investments, it is a case of “buyers beware”. Always do the necessary due diligence and research before you commit to any investment. In particular, alternative investments should be more thoroughly considered before you add them to your portfolio.