Traditional Investments Vs Alternative Investments

The Breakdown

Luke Sparkes
16 Dec 2019

The investment landscape of 2019 is a far cry from the days where fortunes were made or lost by men in suits trading frantically on the stock exchange floor. While bullish investors nervously studying graphs to trade stocks and shares still exist, now there are also many other ways to invest with success. Here we provide a jargon-busting breakdown of what alternative and traditional investments actually are and give our take on smart ways to invest in the current climate.


What are Traditional Investments – and what are their pros and cons?

Traditional investments are primarily cash assets, like stocks, bonds and equity shares. The purchase of a bond essentially allows a government or company to borrow your money, paying an annual return to the investor for the life of the debt. Investors that purchase a stock are buying a small share of a company in the hope of increasing value and therefore profit upon the sale of the shares. The ease of access to the invested money is a big advantage for the traditional investor. The ability to liquidate some or all of your investment very quickly, cashing in on a sudden upturn in investment rates appeals to many, particularly those with short term investment goals.

For investors who lack the confidence and knowledge to cherry pick bonds and stocks, a mutual fund investment can be an appealing prospect. Open Ended Investment Companies (OEICs) pool money alongside that of other potential investors and use it to buy a spread of investments. This eliminates a much uncertainty around purchases, utilising the expertise of a fund manager to spread risk across lots of investments. Investments can often be made with a lot less initial outlay than some alternative investments, although the original investment can go down as well as up.

A disadvantage of traditional investments can be the level of specialist support that is needed to maximise your return. It is difficult to make significant gains without the support of a Financial Adviser, either an independent company or a wealth management partnership such as St James’s Place. Investing in shares also requires stock broking services with their associated dealing charges. Investing in a fund also necessitates payment to the Fund Manager. It is important to ask a firm to clearly explain and provide a breakdown of their charges, and consult the Financial Ombudsman Service in the case of a dispute.

One cannot overlook the volatility of traditional investments which is as much a blessing as it can be a curse to investors. As the success of traditional investments is reliant upon the health of the stock market, indexes and interest rates, your attitude to risk must be carefully considered when entering into deals. Are you happy to take a risk and lose the money you originally invested with the hope of reaping large rewards, or do you need to protect your initial outlay? While some argue that the bigger rewards come with the bigger risks, for others the gamble is simple one they are unwilling to take.  

 

Alternative Investments – Pros and Cons

An alternative investment can be roughly defined as a purchase that is something other than direct cash, for example private equity, hedge funds and commodities like precious metals, fine wine, art and vintage cars. Property is also often classed as an alternative investment although it has links with interest rates.

An inarguable pro of alternative investments is that they can usually hold their own against the global economy. Many investments, such as art remained relatively unscathed during the global financial meltdown of 2008. As the UK teeters on a political and economic precipice, many investors are seeking stability in alternative investments rather than risking it all with stocks and shares.

A clear advantage of alternative investments is that they make for a diversified portfolio, and therefore a robust one. A spread of investments between say fine wines, hedge funds and art means that an investor is less bruised by one flailing market if another is in its buoyancy. There is also the opportunity for one to make money from their area of interest or skill. Those with a specialist knowledge or passion can use this to make informed choices about their investments, and there are many industry experts that can be relied upon to validate your thoughts.

Alternative investments typically have a better return on investment (ROI) than traditional investment avenues, although many require a larger initial commitment to begin with. An investor could be waiting a while for those bigger returns, but the current financial climate might cause many investors to adopt an approach of battening down the hatches anyway, waiting for the political storm to pass before making decisions.

The illiquid nature of alternative investments needs careful consideration. Unlike traditional investments, it is not so easy to cash in your investments early if your personal situation requires it. Real advantages come from holding on to assets and waiting for them to appreciate as the item gets more sought after.

 

The future of traditional and alternative investments

Those with an interest in the current financial markets can see a shift in the type of investments that are proving popular, both in traditional and alternative fields. Traditional investors are looking at current affairs to inform their choices, which is perhaps best demonstrated with the so-called “Greta Thunberg” effect and growth in investments related to carbon offsetting and green energy. Similarly, new investments methods are coming to fruition and savvy investors are looking to methods such as crowdfunding, peer to peer lending and the rise of Bitcoin as ways to succeed. Those making alternative investments may also enjoy the growth of emerging markets such as China and India to boost popularity of their assets. However the next couple of years pan out diversity remains crucial, both to protect from unrecoverable losses and maximise the potential of healthy gains.

 

 

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