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What is Risk – alternative investments?

 

Many investors choose to put their money into alternative assets to the normal ones already discussed in this risk series; cash, bonds, equities, property or precious metals. Investments such as wine, art and antiques are popular as they can be enjoyed as well as (hopefully) increasing in value. But what are the risks of investing your hard earned money here?

The key issue is to decide if you are going to be a collector or investor… your approach will be very different and shouldn’t change once committed to. Always consider supply and demand as your main driver for making money on your investment.

Wine – whether a connoisseur or a tea total everyone knows that bottles of wine can sell for thousands of dollars. There are two main ways to invest – at the barrel stage or buying cases of bottles and holding them. The second is most popular but the risks are clear:

  1. Selection – Research or advice is vital which takes time and money – the choice is vast and the cost of a bottle doesn’t guarantee quality.
  2. Storage – at home or rented cellars – an inevitable cost either way to get the right conditions.
  3. Insurance – consider the cost of protecting your investment against breakage etc. home insurance may not cover this, so check.
  4. Timescale – the longer you hold wine the more is drunk by others meaning your bottles become more valuable… apparently great wine prices peak around 25 years.
  5. Fashion – regions and styles will come in out of fashion with other investors and consumers – the broader your selection the better – one could say this could make wine fairly ‘illiquid’ as it may be difficult to sell certain bottles at certain times (excuse the pun).

Antiques – Investing in antiques is a fairly emotive investment and you should love with your heart before buying with your head! Understand your own style and taste, visit museums, stately homes, auctions and get a feel for what you like; you may have to live with it for a long time. Take advice if you need to and always think: Condition, rarity, provenance, beauty & maker. Consider insurance costs, shipping, storage (if you don’t own a house to display them) breakage or damage and without doubt fashion…. It may become impossible to sell something if that style or period goes out of fashion.

Art – includes paintings, sculpture, prints, video and photography (which is the fastest growing sector of art investment). Art prices have very low correlation to other asset classes but are very volatile as the demand for art is so driven by fashion. Art is incredibly illiquid, but has the benefit that if you can’t sell it you can at least enjoy it as it hangs on your wall. The entry cost is not as high as one might think; 70% of art sold at auction is less than $5000 per piece. Spend as much time as possible speaking to art galleries, curators, museums and collectors to get a good feel for the market. Your investment, importantly, will be driven by your own taste.

Memorabilia – a massive unregulated market, but one with very low cost to entry, one can buy memorabilia at auction, through dealers or even online. Prices for pristine pieces or collections can be high, but the quality must be museum standard. Damage is a big risk here.

This article is for information only and should not be considered as advice.
This article is written by Peter Brooke The Spectrum IFA Group


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