For New Zealanders looking to grow their wealth beyond traditional savings accounts and term deposits, a diverse range of alternative investment options exists. These avenues, while potentially offering higher returns, also come with varying degrees of risk and complexity, requiring careful consideration and due diligence.
Understanding Your Investment Profile
Before diving into specific alternative investments, it’s crucial to assess your individual investment profile. This involves evaluating several key factors:
Risk Tolerance: How comfortable are you with the possibility of losing some or all of your investment? A conservative investor might prefer lower-risk options with modest returns, while a more aggressive investor may be willing to accept higher risk for the potential of significant gains.
Investment Horizon: When will you need the money? Shorter time horizons generally necessitate lower-risk investments, as there’s less time to recover from potential losses. Longer horizons allow for more aggressive strategies that might involve greater volatility. Generally, if you need the money within the next 5 years, alternative investments might not be ideal.
Financial Goals: What are you hoping to achieve with your investments? Are you saving for retirement, a house deposit, or your children’s education? Your financial goals will influence the types of investments that are most appropriate for you.
Capital Available: How much money can you realistically allocate to alternative investments? Some options require significant minimum investments, while others are more accessible with smaller sums.
Knowledge and Experience: Do you possess a good understanding of financial markets and investment principles? If not, it’s essential to educate yourself or seek professional advice before venturing into more complex investments.
Understanding these factors will help you narrow down your choices and make informed decisions that align with your personal circumstances.
Property Investment beyond Residential Homes
While owning a home is a common aspiration for many New Zealanders, property investment can extend beyond acquiring a residential property to live in. There are several avenues to explore:
Commercial Property: Investing in office buildings, retail spaces, or industrial warehouses can provide a consistent rental income stream. However, commercial property requires substantial capital and involves more complex management issues than residential properties. Vacancy rates, tenant quality, and economic downturns can all impact income. Thorough due diligence, including a professional property valuation and legal advice, is essential. Consider factors like location, tenant covenants, and potential for capital appreciation.
Syndicated Property Investments: These investments pool funds from multiple investors to purchase larger properties. Syndicates offer a way to access commercial property without needing to shoulder the entire financial burden and management responsibilities. Returns are typically distributed based on the proportion of investment. However, liquidity can be limited, and it’s important to carefully evaluate the syndicate’s manager and the underlying property. Organizations like Property Institute of New Zealand (PINZ) can provide resources and guidance.
Holiday Homes: Purchasing a property in a popular tourist destination can provide both personal enjoyment and rental income. However, occupancy rates can fluctuate depending on the season, and managing the property remotely can be challenging. Consider factors like location, amenities, and the availability of property management services. Also be aware of local council regulations regarding short-term rentals. Queenstown, for example, is a highly sought-after location, but properties come at a premium.
Land Banking: This involves purchasing land with the expectation that its value will increase over time due to future development. Land banking requires a long-term investment horizon and carries significant risk, as there’s no guarantee that the land will ever be suitable for development. Factors to consider include zoning regulations, infrastructure availability, and the potential for future growth in the area.
Example: Sarah and Mark invest in a small retail unit in a suburban shopping center. They carefully analyze the lease agreements with the current tenants, assessing the strength of their businesses and the potential for rent increases. This diversifies their investment portfolio away from solely residential property.
Peer-to-Peer Lending
Peer-to-peer (P2P) lending platforms connect borrowers directly with lenders, bypassing traditional financial institutions. These platforms offer potentially higher interest rates than bank deposits, but also come with the risk of borrower default.
Diversification is Key: Spread your investment across multiple borrowers to mitigate the impact of any single default. P2P platforms often provide tools to assess borrower risk profiles, but it’s essential to do your own due diligence as well.
Understand the Platform’s Due Diligence Process: How does the platform assess borrowers’ creditworthiness? What measures are in place to recover funds in case of default? A reputable platform will have a robust credit scoring system and collection procedures.
Liquidity Considerations: P2P investments are typically less liquid than bank deposits. You may not be able to access your funds quickly if you need them unexpectedly.
Tax Implications: Interest earned from P2P lending is taxable income.
Examples of local platforms: Squirrel, LendMe and Harmoney (formerly NZAX:HMY) are platforms in New Zealand that facilitate loans. Platforms like these each have their own risk profiles, and potential investors should do their own research before making investment decisions.
Example: David uses a P2P lending platform to lend small amounts to several businesses. While one business defaults, the returns from the other loans more than compensate for the loss, illustrating the importance of diversification.
Investing in Cryptocurrency
Cryptocurrencies like Bitcoin and Ethereum have gained significant popularity in recent years, offering the potential for high returns but also exhibiting extreme volatility. Investing in cryptocurrency is highly speculative and should only be considered by those with a high-risk tolerance and a thorough understanding of the technology.
Volatility: Cryptocurrency prices can fluctuate dramatically in short periods, leading to substantial gains or losses. Invest only what you can afford to lose.
Security Risks: Cryptocurrency exchanges and wallets are vulnerable to hacking and theft. Use strong passwords, enable two-factor authentication, and consider storing your cryptocurrency in a cold wallet (offline storage).
Regulation: The regulatory landscape for cryptocurrency is still evolving, and changes in regulations could impact the value of your investment. You should stay up to date with the latest requirements from the Financial Markets Authority (FMA).
Due Diligence: Research the specific cryptocurrency you’re considering investing in. Understand its underlying technology, use case, and the team behind it. Be wary of “pump and dump” schemes and other fraudulent activities.
Tax Implications: Cryptocurrency transactions are subject to tax. Capital gains tax may be payable on any profits you make from selling or trading cryptocurrency.
Consider Diversification: Avoid putting all your eggs in one basket. A diversified portfolio can help mitigate the risks associated with cryptocurrency investing.
Example: Anna invests a small percentage of her portfolio in Bitcoin, recognizing its potential for high returns but also acknowledging the significant risks involved. She carefully monitors the market and is prepared to sell if the price drops significantly.
Investing in Fine Wine and Collectibles
For those with a passion for specific items, investing in fine wine, art, antiques, or other collectibles can be a rewarding, although often illiquid, alternative investment.
Expertise is Essential: Success in this area requires in-depth knowledge of the market and the specific items you’re investing in. Understanding provenance, condition, and market trends is crucial.
Storage and Insurance: Fine wine and collectibles require proper storage conditions to maintain their value. You’ll also need adequate insurance to protect against damage or theft.
Illiquidity: These investments can be difficult to sell quickly, especially if you need the money urgently. Finding a buyer willing to pay your desired price can take time.
Transaction Costs: Buying and selling collectibles often involves transaction costs, such as auction fees, appraisal fees, and dealer commissions.
Subjectivity: The value of collectibles is often subjective and can be influenced by changing tastes and trends. What’s popular today may not be popular tomorrow.
Example: John, a wine enthusiast, invests in a selection of Bordeaux wines from a highly regarded vintage. He stores the wines in a temperature-controlled cellar and tracks their market value over time. He plans to sell them in a few years when they reach their peak.
Investing in Startups and Early-Stage Businesses
Angel investing or venture capital involves providing capital to startups and early-stage businesses with high growth potential. This can be a high-risk, high-reward investment, as many startups fail.
Due Diligence is Critical: Thoroughly research the company, its management team, its business plan, and its market potential.
Understanding Valuation: Determine whether the company’s valuation is reasonable based on its current performance and future prospects.
Illiquidity: Investments in startups are typically illiquid. It may take several years before you can sell your shares, and there’s no guarantee that you’ll be able to find a buyer.
Portfolio Approach: Invest in a portfolio of startups to increase your chances of success. One or two successful investments can potentially offset the losses from several failures.
Networking and Expertise: Attend industry events, connect with other investors, and seek advice from experienced entrepreneurs and venture capitalists.
Example: Maria invests in a promising technology startup after carefully reviewing its business plan and meeting with its management team. She understands the risks involved but believes the company has the potential to disrupt the industry. She follows the company’s progress closely and provides support where she can. Be aware of crowdfunding platforms like PledgeMe which allows raising capital for companies in exchange equity and Snowball which also supports local venture.
Investing in Managed Funds that Focus on Alternatives
For those who prefer a more hands-off approach, managed funds that focus on alternative investments can provide access to a diversified portfolio of these assets.
Due Diligence on the Fund Manager: Evaluate the fund manager’s track record, investment strategy, and fees. Make sure the fund manager has experience in managing the specific types of alternative investments the fund holds.
Understand the Fund’s Investment Strategy: What types of alternative investments does the fund invest in? What is the fund’s risk profile? Be sure understand the fund strategy before investing.
Fees and Expenses: Managed funds charge fees, which can impact your returns. Compare the fees of different funds before making a decision.
Diversification: A well-diversified alternative investment fund can help mitigate risk.
Liquidity: Check the fund’s liquidity provisions. How easily can you redeem your investment? Some funds may have restrictions on withdrawals.
Example: Robert invests in a managed fund that specializes in private equity. He appreciates the diversification the fund provides and trusts the fund manager’s expertise in selecting promising private equity investments. He has to sign a long term investment agreement for this.
Precious Metals: Gold and Silver
Investing in precious metals like gold and silver is often viewed as a hedge against inflation and economic uncertainty.
Physical vs. Paper Gold: You can invest in physical gold (bullion, coins) or through paper gold (gold ETFs, gold mining stocks). Physical gold offers direct ownership, but requires secure storage and insurance. Paper gold is more liquid but doesn’t provide direct ownership.
Factors Influencing Price: Gold prices are influenced by factors such as inflation, interest rates, currency fluctuations, and geopolitical events.
Storage and Security: If you choose to invest in physical gold, you’ll need to arrange for secure storage, either at home or in a vault.
Transaction Costs: Buying and selling physical gold involves transaction costs, such as dealer markups and storage fees.
Example: Emily buys a small amount of gold bullion as a hedge against potential economic instability. She stores the gold in a safety deposit box at her bank. This provides here a sense of safety during uncertain economic times.
Tax Considerations
It’s vital to understand the tax implications of any investment decision. Seek professional advice from a qualified tax advisor to ensure you comply with all relevant tax laws.
Capital Gains Tax: Profits from the sale of assets held for investment purposes may be subject to capital gains tax.
Income Tax: Interest, dividends, and rental income are taxable income.
GST: Certain investments, such as commercial property rentals, may be subject to Goods and Services Tax (GST).
The Importance of Professional Advice
Navigating the world of alternative investments can be complex. Seeking advice from a qualified financial advisor can help you make informed decisions that align with your investment goals and risk tolerance.
Financial Advisors: A financial advisor can assess your financial situation, help you define your investment goals, and recommend suitable investments.
Accountants: An accountant can help you understand the tax implications of your investment decisions.
Lawyers: A lawyer can provide legal advice on investment contracts and other legal matters.
Remember that no one can guarantee investment success. The key is to do your research, understand the risks involved, and make informed decisions based on your individual circumstances.
Crowdfunding
Crowdfunding investment platforms enable you to invest smaller amounts in a variety of businesses, often startups or small to medium-sized enterprises (SMEs). The minimum investment can be relatively low, making it accessible to a wider range of investors. Types include:
Equity Crowdfunding: You receive shares in the company in exchange for your investment. If the company succeeds, the value of your shares could increase significantly. However, if the company fails, you could lose your entire investment.
Debt Crowdfunding: You lend money to the company, and they repay you with interest over a set period. This is generally considered less risky than equity crowdfunding, but there is still the risk of default.
Reward-Based Crowdfunding: Technically not investment but support, you receive a product or service in return for funding a project.
FAQ Section
What are the main benefits of investing in alternative investments?
Alternative investments can potentially offer higher returns than traditional investments like savings accounts and term deposits. They can also provide diversification to your portfolio, reducing overall risk. However, keep in mind that higher potential returns come with higher risks. Some of the benefits include the potential for inflation hedging, improved risk-adjusted returns and diversification of assets.
What are the main risks associated with alternative investments?
Alternative investments generally carry higher risks than traditional investments. These risks can include illiquidity, lack of transparency, high fees, and the potential for significant losses. Due diligence is extremely important.
How much money do I need to start investing in alternative investments?
The amount of money you need depends on the specific type of alternative investment. Some options, such as P2P lending, may be accessible with relatively small amounts, while others, such as commercial property, require substantial capital.
How do I choose the right alternative investments for my portfolio?
Consider your risk tolerance, investment horizon, financial goals, and capital available. Do your research, seek professional advice if needed, and diversify your investments to mitigate risk.
Where can I find more information about alternative investments in New Zealand?
The Financial Markets Authority (FMA) website provides information and resources for investors. You can also consult with financial advisors, accountants, and lawyers who specialize in alternative investments.
References
Financial Markets Authority (FMA)
Now is the perfect time to broaden your financial horizons. We hope this article gives valuable insights for those looking to diversify their finances and investment opportunities into alternative investment options. Do your due diligence. Consider consulting with professionals. Take control of your financial future and explore what alternative investments can add to your portfolio.
