Are alternative investments a good idea? It depends.
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During the pandemic years, there was a surge of interest in the stock market and investing. Less spoken about is that during the same period, alternative investments and collectibles also exploded in popularity.
These include watches, cars, bags – and yes, even plants!
In most cases, this is simply for the pleasure of owning them; but some collectors also have financial aims. Their collectibles may be a form of wealth accrual or investments.
Globally, one of the best known examples of this would be philatelic investment (stamp collecting). There are even professionally managed funds for stamp collecting, with valuations done by industry experts.
Stamp collectors are looking to both own a part of history (e.g., owning stamps from different historical eras and around the world), as well as holding on to a scarce asset that will appreciate.
While there’s no data about the popularity of stamp collecting in Singapore, what is clear is that investing in watches has been popular for many decades. Investment-grade timepieces are sometimes kept as a legacy for the children and grandchildren; but they can also be sold to collectors if the need ever arises.
Other notable collectibles range from fine art, to wine, rare model trains and even Pokemon cards - the range of what people collect is huge; and so long as there are collectors, there’s usually a resale market and cash value.
How do alternative investments perform?
Some investors will hold part - but not all - of their portfolio in such assets. The benefit is that, because collectibles are not tied to conventional assets like stocks and bonds, they may not experience a drop in value even during wider market downturns.
Collectibles can also produce outsized gains at times, as their value is volatile: if you meet another collector who wants something bad enough, you may earn far more than the official valuation of a piece.
What are the pitfalls of alternative investments?
While investing in alternative investments can be lucrative, it’s also good to be aware of the potential pitfalls and challenges. Here are three we think you need to be aware of before diving in:
Specialised knowledge is required. Alternative investments are far from homogenous when it comes to price appreciation. Collectors need an in-depth knowledge of their potential assets. A watch collector, for example, must be able to identify which time pieces are likely to be investment-grade, and which are too common or mass-produced to hold much value.
Liquidity. Unlike stocks and funds that can be traded on the financial markets, finding a buyer for your luxury watch and bag may prove challenging, especially during a down market. In a scenario where you are desperate to sell, you might make an outsized loss.
Scams and investor protection. Alternative investments are not as tightly regulated as the financial markets, and this increases the risk of fraud, scam or crime.
Case in point: a couple who sold luxury products tried escaping Singapore in a $32 million luxury goods scam! In addition, investor protection is also limited; this is compared to protection schemes such as Securities Investor Protection Corporation (SIPC) that protects share investors from a scenario where their broker goes bust.
Storage and maintenance. Finally, one major risk of collectibles, from an investment perspective, is that they can be damaged or stolen. This often leaves collectors torn between expensive safe deposit boxes (where they cannot enjoy the things they leave), or keeping their collectibles at home.
Protect your alternative investments with a good home contents insurance
Whether you buy alternative investments to invest, or simply because you appreciate them, one of the smartest thing to do is to purchase a home contents insurance policy.
This is an insurance policy that – as described – protects the contents of your home.
Keep in mind this is different from fire insurance – which most HDB and condo owners already have in Singapore. Fire insurance only covers the cost of rebuilding if your place burns down, but nothing else.
With a good home contents insurance plan, you can protect your alternative investments from threats such as fires, floods and theft.
Admittedly, while no amount of insurance payouts cannot replace any emotional attachment to the things you collect, you can at least recoup your losses, and rebuild your assets.
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