by Alyssa Oursler | November 20, 2012 11:00 am
Mom-and-pop investors have plenty of reasons to be wary of the market: the looming fiscal cliff, high-frequency trading glitches, Facebook’s botched IPO and more.
Toss in an incredibly low yield on U.S. Treasury bonds, and investors not only fear the market, but may find themselves at a loss for an appealing alternative.
There’s always the option of buying hard assets, of course. But you don’t have to go as far as hoarding gold to dodge the market in hope of protecting your savings.
But many promising alternatives come with their own share of red flags. From art to antiques, many aren’t liquid, have high costs and barriers to entry, require a lot of expertise and are often based on a perceived value.
Let’s take a look at five possible alternative investments and what you should know before diving in:
One popular acronym for alternative investments is SWAG: silver, wine, art and gold. Let’s start with the W.
Everyone knows that wine gets better — and thus, more valuable — with time, but few people act on it. Fine wine bought through dealers, auctions and exchanges can really pay off.
Of course, participating in a wine exchange comes with high annual membership fees that are unreasonable for most retail investors. Plus, only a tiny proportion of wine in the world will increase in value over time, and even then, it must be bought at the right time, in the right place and under the right conditions.
And as with many alternative investments, a true valuation of wine is nearly impossible: No income, sales, earnings or cash flow is tied to the appreciating price of a bottle. Instead, taste — a subjective quality — is often key, along with intangible value, such as the feeling that comes from sharing an aged bottle with good friends.
Now, another part of SWAG: art. Fine art is pretty self-explanatory, including everything from paintings to sculptures to photography.
For the 10 years ending in July 2010, the price index of all fine artwork sold more than once worldwide produced an annualized return of nearly 11%. It’s almost no wonder, then, that Sotheby’s — a 285-year-old auction company — recently had a record fine art auction.
The headline piece? A $75 million Mark Rothko painting.
Of course, such a performance also sheds light on the reality of fine art investing: It’s quite expensive to get into. Most of us don’t have $75 million, much less $75,000, to shell out for a painting.
Plus, fine art is an extremely volatile asset, and it’s hard to forecast demand for certain artists, genres and styles down the road. On top of that, art is far less liquid than most assets. If you need cash, you can’t expect to find a bidder for your Salvador Dali canvas right off the bat.
If you decide you do want to gather some gold, straight bullion may not be the best way to go. Instead, rare coins offer a unique preposition: two-fold valuation. Value can come from the rarity of a certain coin, along with melt value. A gold coin is worth its weight in gold, literally.
The Federal Trade Commission says to expect to hold your investment for 10 years before possibly realizing profit, but that’s hardly an unreasonable horizon for longer-term investors. The problem is that while a stock’s value is determined by the market, a coin’s is determined by an expert — and that can lead to false claims about worth, grade and so on.
On top of that, even if the value of the metal — whether gold or something else — goes up over time, the value of the coin itself may not, and could actually offset the metal’s appreciation if demand begins to wane.
Investing in coins requires quite a bit of research, although that is — or should be — true for any investment. Most retail investors lack exposure and expertise for the investment to really pay off. Coins are often overgraded, many dealers have limited knowledge about rare coins and the buyer’s charge can eat away profits.
Plus, it can take a long time to sell coins, and even buying them, particularly at an auction, is quite time consuming.
Another alternative is much more familiar for most of us than coins: real estate. One good thing about snatching up a house or property is that it’s a natural hedge against inflation. And while the recent housing crisis is reason enough to proceed cautiously, it has also given home prices plenty of room to appreciate.
Investing in real estate is time-consuming, complex and risky, though. Being a landlord can be both a hassle and a liability, especially if you own a single-family home, which comes with an all-or-nothing cash flow.
Of course, you can get more creative than just being a homeowner. Parking lots, for example, are often described as being as close to recession-proof as you can get. Cars in the U.S. are parked around 96% of the time, making for a $30 billion industry.
The problem is that they’re very expensive and often aren’t found in real estate listings. Just finding a promising deal can require a commercial broker — and that doesn’t come cheap, either. Plus, real estate — like most of these alternatives — are nowhere near as liquid as a publicly traded equity.
If you’ve seen Antique Roadshow, you’ve probably gotten a taste for the rich payoffs that can come from buying the right antique. However, many of the same reservations noted already for other alternatives also apply here.
Antiques aren’t liquid and are only financially good in the long term. The costs of selling an antique can eat up around three years of the piece’s appreciation. Plus, antiques are also based on the perceived value of a piece’s uniqueness, age or style.
Another issue is that the gap between the cost of luxuries like antiques and the cost of necessities has been increasing. While this may make the goods more valuable, it has pushed many pieces out of reach for investors — and for the rest of the public. All in all, the market is shrinking.
It’s also hard to predict the demand for knick-knacks down the road. My dad hunted and hoarded old baseball cards for years with little return other than a $200 rookie card. The same holds true for the countless collectors of once-popular Beanie Babies: 97% of the tiny animals are now worth around 50 cents.
Keep in mind that, regardless of your investment strategy, a diversified portfolio is paramount. Don’t bet your life savings on an ancient artifact.
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