Alternative Investments pose an interesting paradox: with the consistent growth and often tax-free capital gains these assets consistently deliver, why aren’t more individual investors participating in the market to reap outsized rewards with relatively low risk?
While Luxury Investments have remained a popular choice for the most experienced and sophisticated investors, the lucrative potential of these assets remains vastly underexploited.
This behavior poses a conundrum, or seems irrational – and that’s because it is.
Investor behavior is determined not just by rational risk-return considerations, but also by hidden psychological biases that influence individuals to make less than optimal decisions.
Conventional wisdom can hold you back
Behavioral economics holds that all individuals are subject to conditioning, shaped by the lessons they have learnt over the course of their lives, either through experience or guidance.
In investment terms, this means that conventional wisdom, passed down by parents, mentors and our own efforts to acquire knowledge, exerts a huge influence on our behavior – even to the point of inhibiting rational decision-making.
Inherited or conventional wisdom generally advises that high returns, with an acceptable level of risk, are best achieved by creating a diversified portfolio of equities, bonds & gilts, and property
Similarly, Financial Advisors and Investment writers operate within the same received wisdom of portfolio construction.
Their goals are to meet a client’s expectations while minimizing risk, and to ensure their own bank or firm’s fees – which means their first priority isn’t working to maximize their client’s best interests.
Well-intentioned and well informed friends, who may even be professionally qualified, still pass on wisdom based on the same, time-served and venerated model of what a portfolio should look like.
Furthermore, what works for them may not work for you in terms of risk or return appetite, investment timeframe, or individual expertise.
Why Luxury Investments are Lucrative Investments
If individual investors were not subject to the biases of conventional wisdom, they would likely be more comfortable or have a greater command of a broader set of asset classes beyond the traditional trinity of equities, bonds,and properties.
Investors who move beyond the horizon of conventional investment advice to invest in alternatives, such as Luxury Investments, have benefitted from strong growth that consistently outperforms traditional asset classes.
The case for alternative investments as a component of a growth-oriented portfolio is compelling.
Firstly, luxury investments such as classic cars, fine wines, or artworks are independent of other assets and fluctuations in market behavior or economic growth (or recession), which ensures they are significantly less volatile than traditional assets.
The aforementioned luxury assets have seen significant and consistent growth over the last 15 years, even during times of recession.
Robust growth driven by positive demand and limited supply
The secured returns offered by Luxury Investments are a simple factor of the laws of supply and demand.
Luxury investments – such as an artwork, a colored diamond, or a vintage wine from the world’s most exquisite vineyard – are truly rare, and in high demand, which ensures their high value.
Furthermore, as the assets are finite, growing demand increases the scarcity of the asset – and the value of these investment grows at a rate that consistently outperforms traditional investments .
Unlike conventional assets, luxury investments allow individual investors to derive relatively secure growth and often tax-free capital gains.
Do you have the appetite for unconventional investments?
Conditioning and conventional wisdom are powerful influences on all individuals.
By understanding and mitigating these irrational behavioral tendencies, you, can significantly optimize your portfolio.
For many investors, a lack of familiarity and exposure to other asset classes means they feel most comfortable maintaining conventional assets based on a more conservative outlook that guards against actual or perceived risk.
However, if you have the appetite for high-end returns and are willing to expand your investment horizon, alternative assets provide the ideal lucrative, low-risk, and often tax-free investment opportunity.
Think about it: is your current portfolio going to enable you to achieve everything you want in life? Could you do better? Would you like better returns?
Advisory gap: inhibiting individual market participation
Historically, private investors participation in alternative investments has been limited by the scope of advice that IFA’s and wealth managers are authorised to offer.
More often than not, they are not qualified or even allowed to offer advice on alternative investments.
Decide for yourself, then, how likely an advisor is to recommend an investment to you that may well outperform the products he or she can offer.
Of course, such high returning investments come with additional risks when compared to investment such as sovereign bonds and developed marketing equities.
Additionally many, if not most of the companies offering such investments do not operate to the standards we should demand.
However in recent years a number of specialist platforms have emerged that identify best in class providers of such opportunities and work for the best interests of the private investor, and help offer the best route into these lucrative markets.