Alternatives for the Retail Investor
Once upon a time deciding what to invest in depended on the type of investor you were. High net worth or retail; low risk or high risk determined what options were available to you and your average retail investor could not access the alternatives market.
Traditional investments like cash, stocks and bonds have seen their yields plunge with substantial returns mostly found in high-risk portfolios. Fixed interest term deposits offering paltry rates for the past decade with little to suggest it will improve any time soon and the markets being in a state of perpetual flux, has seen shares offering dwindling returns.
It’s a truism that the greater the risk the greater the reward and in the past the best low-risk returns were found in investments unaffordable to the average investor, but with the advent of new technology and financial products this is no longer the case. Investors are now being encouraged to think outside the box and look at alternative investments to increase their returns.
Alternatives for all
Hedge funds, private equity, real estate and other exotic investments were once the exclusive domain of ultra-high-net-worth individuals thanks to prohibitive regulations that discriminated against less affluent investors. However, thanks to liquid alts and fintech they are now accessible to all investors.
The take up for alternatives among retail investor portfolios is slow due to some persistent misconceptions. One such is that liquidity is poor for alternatives, while the reality is more akin to traditional investments, where it varies depending on the balance of liquid assets strategy and product structures with illiquidity premiums.
Fees are often the biggest and most persistent myth that discourages investors. Higher returns often offset the higher alternative management fees. No investment is risk-free or can guarantee specific returns but strategies and portfolios that demand higher fees are justified by the skill involved in culturing those higher returns over traditional investments. Additionally, many fee structures are split into management and performance fees, which often more greatly aligns manager and investor interests.
Diversity helps to insulate
Alternatives were not immune to the financial crash in 2008, however those who had invested in them were generally better insulated than investors with more traditional portfolios. A diverse portfolio with a healthy mix of traditional and alternative assets can be decisively less volatile than an exclusive set of investments.
Diversifying your investment portfolio with alternatives can be lucrative, so what are your options?
It’s always recommended that you seek the advice of an independent financial advisor when making decisions about new investments, although there are a couple of alternatives that you could approach them about.
Investing in real estate can be prohibitively expensive with property prices soaring across Australia and popular world cities. Buy-to-let properties need a lot of seed capital and ongoing management, whilst large scale developments require millions of dollars so for many investors, real estate has been off the cards.
However, thanks to Real Estate Investment Trusts you no longer need to buy property or land to invest in it. You can invest in real estate with your SMSF directly or via a REIT and leave the decisions up to a team who can make the smartest investments – get independent advice before you go ahead to stay onside with the ATO.
There are many other alternative investments to consider outside of private equity, hedge and mutual funds and real estate. There are contemporary investments like direct seed capital, share market floats, real assets and peer-to-peer lending.
Commodities are great for diversification and like REITs, most investment firms will have a function for you to buy commodities direct from your account.
Peer-to-peer lending allows investors to access outsized returns through modern lending schemes. Bank interest rates are often too high for borrowers to afford and too meagre for deposit account savers to make a decent return. P2P lending seeks to fill this gap by matching borrowers and lenders (savers) in a mutually beneficial way. Depending on the platform you use, you can control how much you lend, for how long, at what rate and to whom. You can also use your SMSF to invest in P2P.
P2B or the direct seed capital market is a similar concept where you lend money to businesses. This can be a positive way to boost your local economy and invest in the growth of small to medium sized businesses that can afford a loan but not at bank set interest rates or fail to meet some of the growth inhibiting criteria. You can invest in portions of loans for as little as $50 and like P2P, you can choose where your investment goes so you can support the businesses and industries that you are interested in.
These types of alternative investments not only increase the returns you could earn but in the cases of P2P and P2B reduces reliance on traditional funding from large institutions. If there is one thing the 2008 crash and great recession taught us it is that resilience is fostered by diversity. Thinking outside of the box is the best way to protect and grow your investments and alternatives are more accessible than ever.