Where to Invest in 2021?

It’s an exciting world out there. Beyond property and shares, there’s a host of interesting investment options, says Amy Hamilton Chadwick.

Shares and property hog all the attention when it comes to investments.

They’re relatively easy to understand and there’s a huge amount of information available about them; they’re what we know and what we’re used to. But sometimes you hear about something more exciting. Maybe it’s a kiwifruit orchard. Maybe it’s Bitcoin. Maybe it’s a stake in an exciting new business. These are ‘alternatives’: investments beyond the traditional shares and property asset classes. Alternatives can be almost anything, from forestry to commodities to stamps. This enormous category of investments means it’s hard to talk about alternatives in general, but they usually share certain characteristics. They’re riskier than traditional shares and property; they have higher potential returns; they are less regulated; there’s far less information about them; and they are less liquid (harder to sell if you want to get out). With some careful choices and a bit of luck, alternatives can pay off handsomely. But jump in too hastily and you can wave goodbye to your money. “With alternatives, there’s often a lack of transparency, and also more uncertainty about the outcomes,” says Amelia Wong, investment adviser at Craigs Investment Partners. “A forestry investment, for example, can be very dependent on factors outside your control, like the climate, the increasing costs for growing the timber and the future price of logs. With some alternatives, you could do extremely well or lose the whole lot.”

Why invest in alternatives?

Alternative investments add diversification to your portfolio and allow you to take a chance if you spot an opportunity in the market. Some of the most commonly held alternatives for everyday Kiwi investors are private equity, venture capital, and shares in farms and horticulture operations. “The diversification means that if something changes in the housing market, like a new government regulation that prevents house prices rising, or something goes wrong in the share market, investors have another asset class that may give them a bit of performance,” says Wong. You could invest in a start-up business, for instance, or forestry, or a single farm. “It could do really, really well – or there could be major problems, or a massive flood,” warns Wong. “That’s why this should be a smaller piece of your investments.

“If there’s money I need for retirement, I want to count on it being around. I might want to take a chance, experiment with some investments, but it needs to be money I’m not relying on.”

Choose something you understand

Diversification is a great for your portfolio, but many people get into specific alternatives because they’ve heard about them from friends.

Fear of missing out can be a major driver, but conversations over dinner should not be how to make investment decisions.

“Nobody wants to hear their friends talking about the farm investment that made them millions, or their success in the latest hot hedge fund or trading strategy and feel like they’ve missed out,” says Wong. “But it’s good to remember there’s no such thing as a free lunch. If there’s a higher return, there’s more risk involved, and if you don’t know where the risk is, you should be asking more questions.”

Instead of being talked into joining a syndicate or trying to catch up with a friend who’s made a bundle in futures, choose alternatives that you understand well.

As super-investor Warren Buffett puts it: “Never invest in a business you cannot understand.” Michael Cave, director of Cave Financial, says you should ask yourself three questions. “Do you have a passionate interest in it? Do you understand it? And are you prepared to lose your money? “Understand what you’re investing into, do your due diligence and pay for qualified, independent advice.” He says a client recently looked into investing in a local business that seemed to be doing very well – the returns seemed excellent.

Cave referred the client to an accountant to take a closer look; they found the business had been heavily propped up by last year’s Covid support from the Government and wasn’t producing anywhere near the stated profits. That’s just one example of how professional advice is vital when you’re taking a leap into the unknown.

An easier option might be a fund

Some alternatives are only available to big funds, and you can’t access them as an everyday individual investor.

Other alternatives might be appealing but managing them could be tricky. Owning gold, for instance, has traditionally been a way to protect your portfolio against inflation, but holding physical gold means paying for insurance and safe place to store it. One simpler way to invest in alternatives is to buy shares in a specialist fund, says Cave. “If you don’t want to do the research, and you’re worried about the liquidity, a fund means you have professionals running it and you have a level of transparency and regulation.”

Don’t risk the shirt off your back

Whether you fund a start-up business or buy a classic car, any alternative investment should be limited to a small fraction of your portfolio; Cave says 5 per cent and Wong says 10 per cent at most, with that amount split across several alternatives. “It takes a long time to save money, but it can disappear pretty quickly,” Cave says. “You don’t want to lose the shirt off your back, or the deposit you were saving for a home deposit or a dream trip – which might also put your relationship in jeopardy. “Don’t go sell a kidney to invest in alternatives! The last thing you want to do is have to try and make that money back.”

This information is of a general nature only and does not constitute regulated financial advice. It does not take into account your particular financial situation, objectives, goals, or risk tolerance.”

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