Stocks, term deposits(CD’s in other countries), index funds and bonds are certainly some of the most popular investments. They offer a mix of fixed and variable income, and they allow you to diversify. They will usually be the bulk of your investments.
However, there are many other options out there if you want to diversify even more, or simply experiment with alternative investments. Some of the investments I explain below are not suitable for everyone. They might require larger initial amounts, or might be in specific fields and require expertise. Read on and decide what might work for you.
Here are 8 alternative investments that you may not have thought of:
Investing in forestry can include buying or leasing an existing forestry, or acquiring or leasing land to plant a forest on (part of the land can sometimes be used for a different purpose). You can also invest in forestry rights, which means buying the rights to maintain a forest on someone else’s land. Investing in forestry can be done through a professionally managed syndicate or forestry partnership.
Forestry has some unique characteristics. It usually generates negative cash-flow at the start, and strong cash-flow later. It is a long term investment of up to 35 years. It can also be a tax-effective investment, because of how the cash-flow is generated. There are tax-deductible costs early in the life of the forest, and taxable cash receipts only when the forest is harvested.
Some of the downsides of investing in forestry are the uncertainty for future demand, risks such as pests and fire, and competition, especially from alternative products and developing countries.
If you like the idea of investing in forestry, but prefer a more hands-ff approach, there are also REITs (Weyerhaeuser, Rayonier, PotlatchDeltic Corp, CatchMark Timber Trust) and ETF’s (iShares Global Timber & Forestry ETF, Invesco MSCI Global Timber ETF) that specialise in timber.
Private equity is the ownership in a company, like shares. However, private equity is not traded in the stock market. Private equity investors are usually more involved in the business than ordinary shareholders would be, and need to have the required skills and resources.
Investing in Private Equity includes:
Venture capital: Investing in small companies that have strong growth potential.
Buyouts: Investing in companies that need funds for growth or consolidation.
Investing in private equity is risky and may take a long time to offer a return. However, returns may be very high.
Collectibles include assets such as art, antiques, wine, coins, stamps, books, comics and jewellery. This type of investment has some unique characteristics, and is not usually a great investment in terms of ROI.
The price of collectibles is based on what people are willing to pay, rather than their intrinsic value, and there is no guarantee of the value until the item is sold. Collectibles also don’t produce any cash flow until they are sold, and may take a long time to appreciate in value (if they do).
In this category, intangible factors such as trends and investor sentiment have a huge impact on the price. This type of investment is not usually recommended, but some investors choose this asset class based on personal interest or for the enjoyment of collecting.
Binary options are a type of options contract based on predicting if a particular asset price will increase (a call) or decrease (a put) at a specific date, time and value – “strike price”.
Binary options are a yes/no proposition. If the trader prediction is wrong, their account will be debited for the loss, and if they are right, they will receive the profits. Binary options are traded on regulated exchanges, such as the Chicago Mercantile Exchange, Inc. (CME) and the North American Derivatives Exchange, Inc. (NADEX).
Cryptocurrencies have been very popular in the past year, and provided good returns for early investors. However, they are risky, highly volatile and not highly regulated (not regulated in New Zealand).
Cryptocurrencies are virtual currencies that use encryption technology. This technology controls the amount of currency issued, the ownership and payments. There are thousands of different cryptocurrencies available, and including the popular Bitcoin, Ethereum and Litecoin. Cryptocurrency is held in a ‘digital wallet’, and it can be used to buy goods or services from any vendors that accept it.
While most cryptocurrencies have increased in value over the past few years, it is a risky and speculative investment. If you choose to invest in crypto, make sure to choose a reputable platform and think very carefully about what percentage of your net worth you want to allocate to this high risk asset.
Foreign exchange trading (forex) is the buying and selling of foreign currencies. A profit is made based on the price fluctuations of the chosen currency.
It is becoming increasingly popular, especially amongst investors trying to make a quick profit. You can invest in forex through specialised brokerage accounts. But remember, investing should be different from gambling, so it’s important to consider all risks when investing in Forex.
Foreign exchange trading is also used for hedging, which creates certainty regarding the future costs of foreign currency payments.
Equity crowdfunding works when a number of people (the crowd) invest small amounts of money to raise funds for a company.
When you invest in equity crowdfunding you are essentially buying shares, but not in an established company through the stock market. As an investment it is quite risky and there is no guarantee of any returns. However, it may also do well.
Peer-to-peer lending works by matching people who need to borrow money (borrowers) and investors who are willing to lend money (lenders). Investors loan money directly to a person or small business.
Peer-to-peer lending usually offer higher returns than bonds or CDs (term deposits). They are also riskier in terms of the borrower defaulting any payments.
Some peer-to-peer platforms (like Squirrel in New Zealand) offer more protection against borrowers defaulting. It’s worth doing your research to see the protection that different companies can offer.
I hope you enjoyed reading about some alternative investments. Which ones have you tried?