Alternative Investment Lessons – Buy Physical Assets
In the current climate, investors are seeking alternatives to traditional investment assets, hoping to preserve capital, avoid the ravages of volatile equity markets, and generate investment returns that are not wholly dependent on the performance of the wider financial markets.
Physical assets are proving most popular with investors, items that retain a tangible value, rather than paper-based investments that can ultimately reduce in value to zero, despite the value of any underlying assets. Gold is the prime example. Whenever the stock market fall substantially, investors sell shares and buy gold. The resulting spike in demand for what is a finite asset drives up the price, creating returns for investors.
Other alternative investment assets that are becoming increasingly popular also rely on supply and demand for their capital value, but where demand is guaranteed. Farmland is a good example; there is a finite stock of suitable arable land, most of which is already being used, yet the population is not only growing in size, but also in consumption per capita of food and energy. This means that the product of farmland -crops – will continue to rise in price as demand outweighs supply. This creates an income stream with a positive correlation to population growth. Also, as the land earns more money it too becomes a more valuable assets, so farmland rises in value faster than the rate of inflation providing a good capital preserve as well as income.
Farmland as an alternative investment now forms part of the investment portfolios of a number of major pension funds, hedge funds, sovereign wealth funds and university endowments. Long-term investors that can afford to hold the asset for some time are well positioned to preserve and grow capital whilst also generating income.
Investing in real assets like farmland protects the investor from short term market volatility, as these kind of alternative investment assets have a real use, they hold real value. Some investor attempt to harness this growth in global consumption by investing in agribusinesses through the equity markets, but whilst this method of investment will capture broad sector-wide growth, the value of even great companies falls when the market dips or crashes.
Another alternative investment asset that relies on demand for essential commodities is timber. Investors that purchase commercial woodland, earn revenue from timber sales at harvest, so returns are dependent on the growth of trees, rather than financial markets. Also, trees retain their value, and grow into bigger, more valuable trees every year.
Forestry investments are similar to farmland investments in a number of respects; in the first instance, they benefit from increasing demand and limited supply, they retain value when the markets crash, and investing in timber companies does not provide the same shelter as investing in the physical asset.
But timber is unique in one respect, and that is that not only do the trees grow bigger giving more timber to sell, they also grow in value as timber prices increase in line with, or faster than the rate of inflation.
There are all kinds of alternative investments, but many share very similar characteristics as laid out in this article. They rely on supply and demand, rarer items command higher prices, and their performance has a low or negative correlation to traditional assets like stock and shares. The same can be said for investing in fine wine, art or collectibles, all of which are also becoming more and more popular as alternative investments.