Alternative investments - anything from art to fine wine and vintage cars - can be both great fun and an enormous step towards diversifying your wealth and risk, says Bengt Saelensminde.
"What on earth do you know about brewing beer?" I had just told my wife that I was thinking of setting up a brewery. And she was staring at me as if I was demented. "Have you gone mad?"
It's a fair question. When I was first approached about using a disused distillery I own to produce beer, I thought it was slightly absurd too - I know next to nothing about brewingbeer. But there are at least two very good reasons why I'm tempted. For one thing it would be fun. (My wife, nodded doubtfully). And for another -well, I couldn't tell my wife the second reason straight away. I think it's wise to wait for the initial shock to wear off.
But I would like to explain my reasoning to you now. Because it might just persuade you to do something different too.
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Why the rich hold 10% of their wealth in Alternative Investments
Now, my wife is right. I may know next to nothing about brewing beer, but I do know a thing or two about diversifyingassets.
And the fact is that alternative investments - we're talking about anything from beer to art, antiques, gold, fine wine and vintage cars - can be both great fun as well as an enormous step towards diversifying your wealth.
Alternatives are pretty uncorrelated to financial markets, so they act as a powerful diversification tool. A report by Cap Gemini and Ernst & Young reckons that the rich put around 10% of their wealth into alternatives! But there are a number of serious considerations to bear in mind before you allocate that kind of wealth to them.
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You need to really enjoy alternatives to invest
For one thing, you may not even derive an income from the alternative investment you enjoy the most. For instance, a stamp collection won't earn you any money sitting on a bookshelf, whereas a vintage Rolls Royce might.
If it's income you want, then you'll need to put in a bit more work. Renting out a wedding car or a holiday home can get you a return, and today there are loads of websites that'll take care of the marketing.
Of course, there's hassle associated with all of this. Most of the things that come with an income come with maintenance and insurance costs too. Then there are transaction costs. Financial investments have pretty small transaction costs, but alternatives can easily rack up to 20%. That means you only want to invest if you're prepared to tie up your capital for the long term. Unless you really know what you're doing, over-trading will seriously erode your capital.
But there are a number of very good reasons to consider alternative investments right now.
Why alternatives make a great insurance policy
My advice is to invest in something that really interests you. If I'm investing in alternatives, I want to pick them up myself. I want the pleasure of having the thing close to hand.
Another reason to hold alternative investments is as a 'real asset' if something goes horribly wrong in the markets.
QE is nothing short of a great experiment with our monetary base. The economy is in such a parlous state that the Bank has put rates to a 300 year low and is printing money as never before. Who knows how this will end.
What we do know is that meddling with our monetary base is leading to insecurity among investors. Why do you think the gold price has soared? It's because confidence in our paper-based financial system has been shaken. Building towards having 10% of your wealth in tradable hard assets may be a smartmove.
It's unlikely that we'll end up in Zimbabwean-like inflationary hell. But then again, that's why we diversify, to insure ourselves against the unlikely. And alternatives provide a pretty cheap insurance policy.
So why a brewery?
About ten years ago, I cashed in some dotcom profits and switched them into property. A disused distillery in the Languedoc, to be precise. I've been renting it out for storage, which gets me a little bit of income. But I've just had an interesting proposal.
An English chap wants to make British beer for the local market. And I think he may be on to something. He's got the experience and he wants to get on with it and set the business up. I'll take a slice of the action for putting up the premises and a bit of working capital.
Will I enjoy getting involved? You betcha. Will it diversify my portfolio? For sure.
So if the figures stack up, I'll be taking the plunge.
Of course, beer production may not be for you. But I urge you to think about alternatives (or hard assets as I like to call them). Stick to something you enjoy and understand and you won't go far wrong.
The FSA does not regulate certain activities, this includes the buying and selling of alternative investments. Your capital is at risk when you invest - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Theo Casey. The Right Side is issued by MoneyWeek Ltd. MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798. https://www.fsa.gov.uk/register/home.do
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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.
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