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Putting money in alternative investments, from music to marijuana companies

Along with making investing easier, technology and regulatory changes are also making once-exotic investments available to more people.

Done right, as investment management firm Kiplinger explains it, adding alternatives to your portfolio can be a “magic elixir that delivers higher returns with less risk”.

Done right, as investment management firm Kiplinger explains it, adding alternatives to your portfolio can be a “magic elixir that delivers higher returns with less risk”.

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SINGAPORE — Along with making investing easier, technology and regulatory changes are also making once-exotic investments available to more people.

From exchange-traded funds (ETFs) that invest in marijuana companies to investments in music rights or milk, investors have a multitude of choices.

Most individual investors put their money into traditional investments, focusing on stocks, bonds and real estate. And that works well for many people.

By going beyond these traditional categories and making alternative investments, though, investors can improve their returns.  

The reason is that adding alternative investments to equities, bonds and real assets provides a fourth asset group that can reduce portfolio volatility and deliver different revenue streams. Done right, as investment management firm Kiplinger explains it, adding alternatives to your portfolio can be a “magic elixir that delivers higher returns with less risk”.

Simcorp, an investment management solutions provider, suggests that the three main advantages of alternative assets are portfolio diversification, a hedge against inflation, and a strong profile of risk-adjusted returns. They are, however, relatively high-risk assets.

The range of alternative investments is quite broad. They traditionally include art, antiques, coins, forestry, jewellery and wine well as hedge funds and commodities.

The returns can indeed be good. Property management firm Knight Frank, which produces the annual Knight Frank Luxury Investment Index, said that art rose by 21 per cent last year while wine rose 11 per cent. Jewellery has risen by 138 per cent over the past 10 years.

NEWER ALTERNATIVE ASSETS

More recently, new types of alternative assets have opened up to average investors.

Crowdfunding, for instance, enables investors here to put their money into loans to small- and medium-sized enterprises (SMEs) or funding for start-ups.

Funded Here, for example, enables professional investors with an income of at least S$100,000 a year to invest in start-ups. Investors could recently put money into AEvice Health, which produces smart wearable devices for asthmatic children, and Ebeecare, a home services booking platform.

Companies such as Moolahsense and Funding Societies offer investments in loans to SMEs. While there are clearly risks, in that SMEs which borrow money could go bust, Moolahsense says it achieves returns of 12 to 15 per cent for its investors.

Music aficionados can use Royalty Exchange to invest in music royalties, earning income from royalty payments on songs. Royalty Exchange says royalties perform independently of stock markets and generate income that rivals bonds or dividend-paying stocks.

Investors who prefer agriculture can turn to New Zealand, which has long offered collective investments in various sectors. MyFarm, for instance, offers investing opportunities in hops farms that produce ingredients for beer, dairy farms, vineyards, and apple orchards.

Roger Dickie New Zealand focuses more on investments in forestry, though it offers dairy farm investments as well. MyFarm says dairy farms can offer 5 per cent returns annually, while apple orchards target 7 to 8 per cent.

Investors with access to exchanges in the United States have a wide range of options through ETFs. Robo-adviser Motif, for example, enables investors to choose themes ranging from wearable tech or shale oil to climate change or sports.

And while investors have been able to buy shares in alcohol or tobacco firms or ETFs that invest in them for years, the legalisation of marijuana in North America has led to new marijuana companies such as Canopy Growth in Canada and ETFs such as ETFMG in the US.

The advantage is that people engage in legal vice activities even when the economy is not performing well, so shares can outperform other market segments.

Almost no matter what you want to invest in, then, these firms or others can meet your needs.

EVALUATE CAREFULLY

While alternative investments can be attractive, they are also often riskier than traditional investments.

If you want to benefit from them, investment advisory firm Motley Fool suggests that you commit to understanding them fully and weeding out poor options to find the best fit for your portfolio.

Several factors are especially important.

The first step is to decide whether the investment matches your goals and risk tolerance. To justify the risk, projected return needs to be high enough meet your objectives.

And if you can’t tolerate a drop in the value of the asset, it may be better to stick to traditional investments.

Next, assess the asset itself, just as you would any other investment. You can look at factors such as the performance of the company, the economic outlook for the sector and the quality of management to assess the likelihood that the company will succeed and the value will increase.

And finally, be sure to look at the time frame for the investment. While loans to SMEs may be paid within six months, investments in forests or orchards can take many years to realise a return. The duration needs to match your time horizon.

While it may be fun to invest in alternative assets and talk about them, it is even more important to select the right ones to enhance your investment portfolio.

Choosing investments well can help increase your wealth if you are careful with what you buy.

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