Finance: Alternative Investments
Apart from the plethora of traditional investment vehicles such as stocks, bonds, options, futures, foreign currency, various derivates of the before-mentioned, real estate interests of all kinds, gemstones and precious metals – other investment opportunities still exist. The broadest way to categorize these alternatives is to call them “collectables”, however this term has garnered a poor connotation among government law makers as explored later. So, to play it safe, you will want to refer to your collectables as Alternative Assets/Investments.
Alternative investments can include coins, art, and artifacts such as one might find in a museum. Investing in alternatives carries much more uncertainty than do traditional investment vehicles. Some of these uncertainties include a lack of transparent pricing, illiquidity, and fraud. However, with a little patience and a desire to learn, these obstacles can be overcome with relative ease.
Alternative investments offer many benefits over traditional investments. While stocks and bonds generally follow the macroeconomic business cycle, the art market operates on a different cycle, as does the coin market, and as do others. You have to figure that there will always be one type of investment appreciating in any economy. Factoring alternative investments into your overall investment portfolio will allow you to capitalize on gains regardless of a particular market condition. Part of diversification means that you will usually, if not always, have something to sell in a given economic environment. Being diversified helps ensure you financial security by allowing you to keep unrealized losses just as they are, unrealized.
Some alternative investments, most notably pre 1933 coins, are also non-reportable items in the eyes of the IRS. By not having to report certain assets, these purchases can become much more desirable investments for higher taxed individuals. Keep in mind that any transaction over $10,000 will be reportable to the IRS, regardless of the item being transferred. Also, anything deemed as a “collectable” and held for over a year, is legally taxable at 28%. Either way, there is much less of a paper trail surrounding alternative investments than there is with stocks.
*noteworthy* There are also initiatives in Congress to allow certified coins to be held in IRA’s, as platinum, gold, silver, and palladium bullion are currently the only “alternative” investments allowed.
WHERE DO I START?
Your journey into the world of alternative investments begins first either by having an interest in a particular type of category of investment or by developing one. In either cases, you will want to educate yourself as much as possible about your chosen area. You can buy books, visit museums, art galleries, auctions, dealers and surf the world wide web. Becoming familiar with traits and characteristics that make certain pieces better than others is arguably the first skill you should acquire. You need to develop an “eye” for what you are looking at.
*Establishing contacts with people working in this industry will be far more valuable than anything you can read. They can impart bits of knowledge they have learned throughout their career onto you, report the market conditions from the front lines, and will be a resource if and when you choose to dispose of these assets.
Given the infinite number of things people can collect and invest in, future postings will focus on some of the more prominent and widely recognized alternative investments: coins, art, mineral specimens, and pirate treasure.
A few basic tips:
1. Buy the best you can. It is better to have one great something than a handful of mediocre ones. This is easier to do when items are graded, such as certified coins. In the art market, I would try to buy something from an established artist. A $5,000 Miro print would be a better candidate than a $10,000 painting from a local artist – form an investment standpoint, in my opinion. This is all relative to what the objectives of you collection are.
2. Pedigreed items are much more desirable. If a piece has been to auction at Christie’s, it will be more desirable for you and future collectors. A traceable history gives buyers more confidence when looking at your piece. A bonus is that most pieces appearing in large auctions have been further inspected, graded and authenticated by the auction specialist at that company. Finally, pieces that were once a part of well-recognized collections (another form of pedigree) will also garner more attention. Would you rather have an original Da Vinci from your neighbor down the street or one that was once a part of the Queen of England’s private collection? In the world of alternative investments, the “cool” factor definitely comes into play.
3. Do not expect to “flip” you investment. Think about how many “flippers” got burned in the recent real estate collapse. This isn’t to say that you might not be unusually lucky and find that people are jumping head over heels for whatever you just purchased – just that it is unlikely and don’t expect it. Part of the return on your investment is based on the scarcity of the item. The longer you keep it out of the market, the more attention (and money) it will likely attract when reintroduced for sale.
4. Due Dilligence! Pay attention to market trends. Find blogs, network with other collectors, befriend dealers, keep up with auctions, etc… You will want to know how the market is reacting to particular styles and tastes at a given time. Just like avid stock investors keep up with daily market news, finding information on market activity for whatever asset class you invest in will help you better gauge when to acquire or dispose of particular pieces.
5. Following the above advice, buy low and sell high. Just because something is temporarily “out of fashion”, do not expect that trend to last indefinitely. This could be a good signal to buy or a bad signal to sell. Contrarian investors often realize much higher returns as they assume the risk early on. This immediate risk is less significant as you are already planning to hold your acquisition for a relatively long period of time, right?
Stay tuned for future posts, where specific investment types will be covered in more depth giving you better perspective on the pros and cons of various asset types.
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