Alternative investments as an original Christmas present?

When it comes to gifting, traders and investors can be a hard-to-please sort. After all, money is often not an issue for them, so they can buy themselves pretty much anything they can think of. So if you have someone like this in your life and you're thinking about giving them a present, try to think outside the box! Alternative investments that have experienced an unprecedented boom in the last few years, might be that kind of present

Limited edition bottles of alcohol, jewelry, collectibles, or art from up-and-coming young artists, are one of the things that tend to increase in value over time. They can make both experienced investors, and those who are just getting interested in investing, happy. So, in this article, we'll break down the pros and cons of alternative investments and give you tips on some of them.

Why is alternative investment a good choice?

Investing is like spreading out your eggs into different baskets to be on the safe side. It's all about not putting everything in one place so that if something goes wrong in one area, you don't lose everything.

Now, there's this thing called diversification, which means not putting all your money in one type of investment. Think of it as having different types of investments, like stocks, real estate, or metals, so that if one doesn't do well, the others might.

Correlation is a bit like checking if your investments are friends or not. Some investments act similarly when the economy is doing well (that's positive correlation), while others might do the opposite (negative correlation). If one group is having a good time, the other might not be as happy.

For example, when things are going great, stocks and real estate might be on the rise. But when things take a turn, like they always do, stocks might go down. That's when things like gold, the US dollar, or certain types of bonds become more popular because they can be safer.

So, putting together a mix of these different investments is a bit like making sure you have friends who get along but also have different interests. It's not easy, even for experienced investors, to be ready for everything that might happen. But by spreading your investments around, you're doing your best to be prepared for different situations. It's like having a bunch of different friends to rely on!

In recent years, there has been a growing interest in alternative investments as a way to diversify portfolios. These investments offer exposure to markets and assets that operate independently of and do not necessarily follow the patterns of, traditional stocks or bonds. Simply put, including alternative investments alongside more conventional ones can help manage overall risks and potential losses during economic downturns.

So, if those you want to present with an alternative investment own a few shares of major global companies, a bottle of luxury wine from a renowned family vineyard somewhere in France can help ease their pain of potential losses in turbulent economic times - and they don't even have to open it!

We often come across news in the media about record-breaking auctions for items like cars, art, or postage stamps. This leads to the question: what falls into the category of alternative investments? The possibilities seem endless; these days, almost anything can be considered an alternative investment. However, the more typical choices include investments in art, watches, wine, whisky, cognac, or cars. The next question is: what factors should one consider when deciding on an alternative investment?

_{Indexed average of sale prices of art objects from auction houses since 2007. The index started with a value of 1000 in 1978. Source: artmarketresearch.com}

Benefits of Alternative Investments:

1. Less Affected by Market Events: some alternative investments tend to march to their own beat, not getting too bothered by regular economic ups and downs. This is great for diversifying your portfolio and toning down the overall risk.

2. Potential for Nice Profits: stuff like art, watches, luxury real estate, or rare collectibles can see their value shoot up. It's not just about mixing things up in your portfolio; it's also a chance to make some serious gains.

3. Personal Enjoyment: one big plus with alternative investments is that many folks put their money into things they're genuinely into. Whether you're a car buff, watch enthusiast, art lover, or fashion fan, there's a lot of room for personal interests. And let's be real - you can't frame digital shares and put them on your wall, or take a joyride in them, or have a drink with them. Alternative investments bring both pleasure and practicality!

Drawbacks of Alternative Investments

1. Tied to Economic Cycles​: it's a bit of a paradox - while alternative investments are often praised for diversifying portfolios, not all of them are immune to economic cycles. Just like in the stock markets, some alternatives can form a bubble and then pop. Take the Rolex watch price index, for instance, as shown in the chart below. Compare that to the 5-year performance of the S&P 500 index, a solid indicator of the US economy. Both peaked around the same time. While stocks have bounced back in 2023 after a dip in 2022, Rolex watches continue to decline. Luxury real estate, for example, tends to move in sync with market sentiments and interest rates. The rule here is simple – the rarer and more limited the asset, the less it reacts to market swings.

2. Correlation with Market Sentiments: certain alternative investments, like luxury real estate, are closely tied to overall market moods and especially interest rates. When the markets are up, they flourish; when sentiments dip, so does their value. The key principle here is that the scarcer and more exclusive the asset, the less it's affected by market ups and downs.

   
   

   _{Rolex watch price index over 5 years. Source: WatchCharts}

   
   
   _{The S&P 500 index for 5 years. Source: Google}

3. Limited Liquidity: one significant downside for many is the relatively low liquidity of various alternative assets compared to regular stocks or bonds. Unlike stocks, these investments can't be quickly sold or converted to cash. Currently, there's no centralized exchange for them like there is for stocks. Selling alternative assets at your desired price can be a time-consuming process. Additionally, considering the relatively small market in the Czech Republic, focusing on foreign markets might be more beneficial.

4. Availability Challenges: collectibles often face a hurdle – their scarcity. This scarcity is what tends to drive prices upward over time. Think about it – Picasso won't be creating more paintings, Ferrari won't be producing more 250 GTOs, and Paul Newman won't be acquiring another Rolex Daytona. While we're highlighting the priciest of alternative investments, the point stands. Thorough research is crucial, especially if you have limited capital. Rather than jumping into assets that have already skyrocketed in value, it's wiser to seek those with potential for growth over the next couple of decades.

5. Counterfeit Risks and Theft​: in certain realms like watches, art, or fashion, the threat of counterfeits is no joke. It's essential to invest time in research and purchase only from reputable shops and trustworthy sellers. Opting for the lowest price might not always be the safest route. Some alternative assets, due to their size, are better off stored in a secure bank deposit box. Of course, this introduces additional costs for safekeeping and insurance, not to mention the inherent risk of theft.

How to Proceed When Buying Alternative Investments?

While we've already highlighted key principles in the preceding paragraphs, the approach to investing in alternative assets mirrors that of stocks, bonds, and commodities.

Thorough Research​: just like with traditional investments, comprehensive research is crucial when delving into alternative assets. Understanding the market dynamics and the intrinsic value of a particular alternative asset is paramount. Factors such as investment time horizon, external influences, market depth, and liquidity should all be taken into account. Thorough research is non-negotiable in this arena. However, here's where personal interest, or the "hobby" factor, comes into play. Investors are advised to choose assets that resonate with their personal interests. If you're considering an alternative investment as a gift for someone close, aligning it with their interests simplifies the research process, making it more enjoyable and informed.
 

Specific Examples of Alternative Investments

• Art and Collectibles

  Invest in paintings, sculptures, historical artifacts, and collectibles. The scarcer the item, the higher the potential for a lucrative return. Keeping an eye on the art scene, especially emerging artists with promising futures, can be rewarding.

• Real Estate

  Beyond the typical residential or commercial properties, real estate constitutes an alternative investment. This includes investments in luxury or exclusive spaces like villas, historic homes, or vacation rentals. Returns for investors may come through capital gains upon sale or "dividends" in the form of rental income.

• Watches and Jewelry

  Luxury watches and jewelry featuring precious stones or unique designs are gaining popularity as investment items.

• Wine and Luxury Alcohol

  Rare and fine wine, whiskey, or other alcoholic beverages, especially those with historical significance, present investment opportunities. In some regions, investments in spirits like rum and gin are notably popular.

• Cryptocurrencies

  Digital currencies such as Bitcoin and Ethereum, despite being considered risky, have become attractive investments with substantial growth potential. The anticipation of a Bitcoin ETF could further boost their popularity.

• Commodities

  Investments in commodities like gold, silver, oil, and grains can offer inflation protection and diversify a portfolio.

• Venture Capital

  Investing in growth companies, including those at the startup stage, can offer high growth and return potential, though it comes with significant risk.

• Other Assets

  Alternative investments extend to antiques, rare books, historical documents, and automobiles, including limited edition new cars or vintage classics. Each presents its unique investment potential.

Conclusion

As you contemplate what unique investment-themed gift to present to your loved ones this year, we hope our article has sparked some inspiration. We understand that some of the mentioned items may exceed the budget of an average gift-giver. The beauty of alternative investments lies in their diverse range; it doesn't have to be a luxury car or a plot of land in Tuscany. With a few hours invested in research, you might discover alternative investments that won't break the bank. For instance, those investment-worthy bottles of gin we mentioned? They typically sell for around €50 a much more feasible price point. And if the investment doesn't pan out, at least you and your loved ones can enjoy it together. Cheers to thoughtful and unique gifts that can also be shared experiences!

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