It’s no secret that a well-diversified portfolio is crucial for accumulating long-term wealth. Equities, bonds and mutual funds (also known as vanilla options) can provide variety, but today’s experienced investor is always looking beyond these conventional asset classes, to non-traditional options or alternatives.
Alternative investments such as gold, art, and other commodities, have typically been regarded as high-risk, exotic options reserved for ultra-high-net-worth individuals and institutions. However, the reality is that alternatives deserve a core and strategic place in nearly every portfolio, especially those that are resilient and can withstand uncertainty.
Diversifying beyond plain Vanilla
Alternative investments are the pillars for wealth management and should be open to more investors. Working with authorised partners, M36 offers access to a wide array of investments thus allowing you diversify your savings and investment portfolio and spread your risk. As alternative investments show a low correlation to other financial assets, they can act as a hedge against any fluctuations in the financial market and have the added benefit of enhancing your return profiles.
Despite the benefits of alternative investments, they do not come without risks. Alternative investments typically have higher fees, are illiquid, and usually have higher minimum investment requirements. While they may not be for everyone, they are worth considering. Below are three common examples.
Art
Like stocks and bonds, art can increase in value. Of course, the most famous artists and paintings are worth vast sums of money, but opportunities remain for lower level investments. As a long-term investment, returns on art vary considerably between genres and artists but, as the data shows, it can be a profitable investment if you know what to look out for.
Pros and cons
- Less volatility than stocks and other markets
- Steady appreciation, so can offer good returns
- You can enjoy the artwork while you wait to sell
- Variety of artists/artworks for individuals to invest in at different levels
- There’s no guarantee that the piece will appreciate
- Requires industry knowledge – potential for forgeries
- Limited liquidity so may be difficult to sell
Gold
Gold is widely regarded as a ‘safe investment’ as it generally isn’t as volatile as some other investment choices. Since gold has intrinsic value, it is considered a reliable and stable option that can offer investors some protection against economic turmoil and under-performance. Although gold prices are not invulnerable to drops in value, the overall trend is solid. Even when prices fall, it still holds considerable value.
Pros and cons
- Historically, gold has also offered investors protection against inflation
- Enduring store of value
- Universally valued
- Investing in gold is fairly accessible
- Potential rewards may not be as great as other investments; does not produce any income, interest or dividends
Cryptocurrency
According to the 2020 Global Crypto Adoption Index by Chainalysis, Nigeria is among the highest-ranking countries in the world by cryptocurrency adoption. Bitcoin, the best-known and first major cryptocurrency has largely driven this adoption. It remains the market leader with a market capitalisation of a staggering $400bn (as of February 2021).
The adoption of cryptocurrency has in the last couple of months seen high adoption rates from institutional investors, brokerage firms and fund houses. This has driven pricing and acceptance by the market. Most experienced financial advisors recommend that investors should only invest 15% or less of their portfolio in this asset class. Although crypto enthusiasts would advise that investors do the opposite, but as this is a new market, it isn’t advisable. They remain one of the hottest commodities in the world.
Pros and cons
- Opportunities for great returns as market is at infancy.
- Fast becoming a store of value similar to Gold, like gold pricing is universal.
- Peer-to-peer system that makes it easier to transfer from person to person around the world, without the need for third party involvement or exchange rates
- Extremely volatile market
- Vulnerable to scams and hackers, although credible exchanges available.
- No historical data available as crypto is an emerging investment class.
- Widely not regulated but some countries are looking at legalising it as well as issuing their own coins. In Nigeria, the Nigerian Securities and Exchange Commission issued regulatory guidelines in September 2020
If you’re considering investing in any of the alternatives mentioned here, determine your investment strategy given your current financial situation, your goals, and your comfort level. The key thing when you invest is to build a diversified portfolio to ensure a fluctuation doesn’t impact the returns on your investment/portfolio. Investing across different assets classes doesn’t necessarily require a huge amount of time looking through many various options which can be confusing and seem complex even for the experienced user. You could simply download the M36 App and get the necessary advice and guidance to make this easier.
Important information: The value of your investments can go down as well as up, so you could get back less than you invest. If you’re not sure which investments are right for you, please request advice, for example from the M36 investment advisors.