Different types of Alternative Investments

As i browsed through the financial readings for the night, I saw this particular watch that is selling for an astonishing price I can ever imagine.

Guess the Price?

Its selling in The Hour Glass for S$150,700! I can only use one word to describe - disbelief. S$150k can buy me a car straight or used as downpayment for a condo or something... And what if you drop it on the floor accidentally? Ouch!

Then again, it spurred my thoughts to head another way - Alternative Investments.

Types of Alternative Investments

Offhand, I can name just a few like Gold, Wine, Watches, Collectible Coins etc... Wanting to know more, i did a search and i realize basically; An alternative investment is any investment other than the three traditional asset classes: stocks, bonds and cash!

So practically many other things like fine art, private equity or real estate are considered alternative investments too! 

Let's take a look at some of the popular ones most investors will pursue (considering hedge funds, private equity are only limited to accredited investors with S$1million or more):

Coins

The collectible coins are valued, not for their weight in precious metals, but because of their scarcity. Popular collectible coins include Morgan dollars, Walking Liberty half dollars and certain Buffalo Nickels. 

Many factors influence how valuable a particular coin can be such as:

1) condition, 

2) which mint mark it carries and 

3) the year of issue. 

Mint condition coins are always more valuable than coins that are heavily worn. Certain years of coins had fewer mintings, making them more rare and valuable [source: Coin World]. For example, some 1918/7-D Buffalo Nickels could be worth as much as $285,000 because the coins were printed with overdates when then 1917 die was impressed with a 1918 hub.

In the coin market, the rarest coins tend to provide huge returns (upwards of 100 percent of their value in a year), while more marginally rare coins provide only modest returns (sometimes as low as 0 percent in a given year). With any investment coins, find a dealer with a good reputation and inspect the coins carefully before making a purchase, as there are always forgeries circulating.

Commodities

There are tons of commodities traded in the futures markets including resources like crops and livestock, fossil fuels such as oil and coal, and precious metals like copper and gold. Nevertheless, the most 2 common commodities people keep a tab on are Oil and Gold prices. 

Do you still remember the financial crisis from the U.S. sub-prime era? During the period, everyone was worried of the hefty debt levels in the U.S. and sought safety in gold; thus Gold sky-rocketed in the aftermath and investors who bought into it early would have seen impressive returns. On the other hand, economies across the globe aren't doing well, and leading to a drag on the oil prices.

There are various ways to buy into commodities (you don't have to buy the actual stuff and store in your house!). One is to buy into commodity futures through a broker which involves leverage or stocks/companies that are into the mining or supply of the relevant commodities. 

Lastly, if you wish to seek diversification, you can also go for exchange traded funds (ETFs) where you can purchase several different commodities at one go, rather than focusing on one. ETFs can eliminate some of the uncertainty from choosing which commodities might rise and fall at a given moment too.

Real Estate/Property

Historically, real estate has been a very popular alternative investment especially in Singapore as people view it as a form of retirement scheme. History has proven itself as many rich people in Singapore do that due to the rise in property prices in the past few decades. 

Buying rental property can usually provide steady, reliable income if you find the right tenants. What's better than having someone else pay for your housing loan and to own a house debt-free at the end of it? This is a way to beat inflation and to take advantage of leverage in the best form, provided that the "ingredients" are well in place.

In contrast, if you are afraid of the hassle of owning a physical property, you can always turn to real estate investment trusts (REITs). They offer a more hands-off, low-risk method of investing in real estate. 

An REIT is a group that invests in various real estate properties, and receives preferential tax treatment from the government in exchange for paying most of its income to shareholders. Investors can purchase shares of REITs on public exchanges, making them one of the more liquid alternative investments. Another upside is that, like stocks, shares in REITs pay out regular dividends.

Bottom-Line

Historically, many of these alternative investments have been more popular among high-net-worth individuals and institutional investors. That's because many alternative investments require larger initial investments than stocks or bonds and are usually less liquid. 

But despite that, there are some advantages to alternative investments. Read on to find out those advantages, and educate yourself before you dip your toes into those murky waters.