Thinking outside the box about investing

There comes a time in all our lives when we start thinking about investing our capital for the future. For some this happens much sooner than others, but something all investors have in common is wondering what to invest in.

Fixed interest term deposits have offered paltry rates for the best part of a decade and there’s little to suggest they’ll get any better soon. Share prices, too, have offered small returns as the markets seem to be in a constant state of flux. In the search for greater returns more investors are being encouraged to think outside the box and look at alternative investments.

Traditional investments like cash, stocks and bonds have seen their yields plunge close to historic lows and returns are increasingly likely to only be found in high-risk portfolios. Risk is a word with negative connotations but it is not necessarily a bad thing — it’s a truism that with greater risk comes greater reward.

Alternatives for all

Investment choices were once limited to stocks and bonds whereas hedge funds, private equity, real estate and other exotic investments were the exclusive domain of ultra-high-net-worth individuals. Regulations prohibited smaller investors from accessing these alternative assets but thanks to the advent of liquid alts and fintech they are now accessible to all investors.

Alternatives can be used in different investor portfolios to great effect but the take up for retail investors is slow due to some persistent misconceptions. One being that liquidity is poor for alternatives when the reality is that, like traditional investments, it varies and there are many strategies to manage the balance of liquid assets and product structures with illiquidity premiums.

The big one is fees. Alternative management fees do tend to be higher but this is often offset by the higher returns. Whilst no investment is risk-free or can guarantee specific returns, strategies and portfolios that demand higher fees are justified by the skill involved in culturing those higher returns when compared with traditional investments. Additionally, many fee structures are split into management and performance fees, which often more greatly aligns manager and investor interests.

Diversity is almost immunity

Another persistent myth is stability. Alternatives were not immune to the financial crash, however those who invested in them were generally exposed less than those with more traditional investments. Some investments in the alternative market are more volatile than stocks and bonds, but no more than other types of investment and others are less volatile than traditional assets. In fact, a diverse portfolio with a healthy mix of traditional and alternative assets can be decisively less volatile than an exclusive set of investments.

Diversifying your investment portfolio with alternatives can be lucrative, so what are your options?

It’s always recommended that you seek the advice of an independent financial advisor when making new investments but there are a couple of alternatives that you could approach them about.

Investing in real estate can be prohibitively expensive, with property prices in Australia, and popular locations around the world, soaring. Buy-to-let properties need a lot of seed capital and ongoing management while large-scale developments require millions of dollars. For many investors, real estate has therefore been off the cards.

However, you no longer need to buy property or land to invest in it as Real Estate Investment Trusts offer returns on property without you needing to become a landlord. You can invest in real estate with your SMSF directly or via a REIT and leave the decisions up to a team who can make the smartest investments — although make sure you get independent advice before you go ahead to stay onside with the ATO.

Further options

There are many other alternative investments to consider outside of private equity, hedge and mutual funds and real estate. There are contemporary investments like direct seed capital, share market floats, real assets and peer-to-peer lending.

Commodities are great for diversification and like REITs, most investment firms will have a function for you to buy commodities direct from your account.

Peer-to-peer lending and direct seed capital, or peer-to-business lending, allow investors to access outsized returns through modern lending schemes. Bank interest rates are often high for borrowers and meagre for deposit account savers, so P2P lending seeks to match borrowers and saver-lenders in a mutually beneficial way. Depending on the platform you use you can control how much you lend, for how long, at what rate and to whom. You can also use your SMSF to invest in P2P.

A similar concept is the P2B or direct seed capital market where you can choose to lend money to businesses. This can be a positive way to boost your hyper-local economy and invest in the growth of small- to medium-sized businesses inhibited by bank set interest rates. You can invest in portions of loans for as little as $50 and like P2P can choose where your investment goes, so you can support the businesses and industries that you are interested in.

These types of alternative investments not only increase the returns you could earn but in the cases of P2P and P2B reduces reliance on traditional funding from large institutions. If there is one thing the 2008 crash and ensuing recession taught us it is that resilience is fostered by diversity, and thinking outside of the box is the best way to protect and grow your investments.