No one could have predicted the onset of the novel coronavirus pandemic in late 2019 and early 2020. The virus spread across the planet in a matter of months with no real end in sight. It is safe to assume that investors from around the world need to think about a...Continue Reading
On April 20, 2020, U.S. crude oil futures fell by 300% to an all-time low of -$40.32 a barrel for the first time in history. Two factors contributed to this decline: Firstly, crude oil storage was much too full. Secondly, refineries were running at historically low...Continue Reading
On April 20, 2020, U.S. crude oil futures fell by 300% to an all-time low of -$40.32 a barrel for the first time in history. Two factors contributed to this decline: Firstly, crude oil storage was much too full. Secondly, refineries were running at historically low levels due to COVID-19 lockdowns. Now, with no relief from the pandemic, where is the oil price heading for the rest of 2020? To answer this, we need to understand what the main drivers of the oil price are: Supply, demand, and market sentiment.
Global Crude Oil Supply Trend
Since the start of the second quarter of 2020, oil production levels have changed significantly. Most OPEC and Non-OPEC nations have agreed to cut production levels — Some oil producers in the U.S. and Canada are forced to reduce production by 3.5 million barrels a day because of these historically low prices, while others have done it to offset the lower demand. For example, in May 2020, OPEC nations produced 24.77 million barrels of oil per day (down by 5.91 million barrels per day over the same period in April 2020).
During the same quarter, countries like India, China, Korea, and the U.S. created strategic storage solutions for up to 200 million barrels in an effort to take advantage of these lower oil prices. Altogether, these measures are sure to create a deficit in supply for the third quarter of 2020.
Global Crude Oil Demand Trend
Due to COVID-19, global oil demand fell by 9.3 million barrels per day. In April 2020 alone, (year-on-year) oil demand lowered by 29 million barrels per day. It is expected that, in Q2 or 2020, oil demand will be lower by 23.1 million barrels per day compared to Q2 2019. If lower demand is not met with cuts in oil production by OPEC, the U.S., and Canada, then the oil price will almost certainly take a hit.
Commodity Cycles and Market Sentiments
Crude oil prices have a short cycle of 6 years and a long cycle of 29 years. Other factors that affect market sentiment can be calculated by understanding the general position of hedgers and speculators in the futures market.
Market sentiment can be calculated from the futures position of hedgers and speculators. In the last week of May 2020, hedgers (i.e. oil producers) had more short positions (1,297,095 contracts) than long positions (725,955 contracts). On the contrary, speculators (i.e. traders) had more long positions (701,234 contracts) than short positions (158,660 contracts). If you combine the position of market participants with the market cycles, one can make a reasonable estimate of oil price movement.
EIA expects Brent crude oil prices will average at $32 a barrel during the second half of 2020 and $48 a barrel on average in 2021. However, this price path reflects an expected global oil consumption to 97.4 million barrels a day during the second half of 2020 along with relatively high compliance to announced OPEC production cuts, both of which are uncertain. The degree to which the U.S. shale industry responds to the current low prices will also affect the oil price path in the coming quarters.
On November 17, 2019, a 55-year-old man in the Hubei province was tested positive for COVID-19, a disease caused by a novel coronavirus. His positive result started a series of events that led to lockdown in 50 countries and the biggest stock market crash of the 21st...Continue Reading
On November 17, 2019, a 55-year-old man in the Hubei province was tested positive for COVID-19, a disease caused by a novel coronavirus. His positive result started a series of events that led to lockdown in 50 countries and the biggest stock market crash of the 21st century. Nothing can prepare us for a pandemic, but we can adapt our portfolio and lifestyle to changing times. Below are the three things you can do to prepare yourself. On November 17, 2019, a 55-year-old man in the Hubei province was tested positive for COVID-19, a disease caused by a novel coronavirus. His positive result started a series of events that led to lockdown in a dozen countries and the biggest stock market crash of the decade. Nothing can prepare us for a pandemic, but we can adapt our portfolio and lifestyle to changing times. Below are the three things you can do to prepare yourself.
Embrace for impact
Investors usually overestimate their risk tolerance. In a falling market, I would recommend deleveraging your portfolio and investing only the capital that you can live without for the next ten years. Another good discipline is to review your holdings timely and identify weaknesses within your portfolio. Stocks you do not want in your portfolio are cyclical companies. Cyclical companies (i.e. Airlines, Hotels, Financial Services and Natural Resources) are the worst hit since the outbreak of COVID-19. Defensive stocks (i.e. Retail, Utilities and Healthcare) are more desirable during the current crisis as they provide essential goods and services for the economy to function properly. Ideally, you should create a watchlist of fundamentally strong defensive companies that you would like to buy.
A balanced All-Weather portfolio
Great portfolios are created by fine-tuning the balance between long term financial objectives and risk tolerance levels. One such great portfolio is the All-Weather Portfolio. All-Weather portfolio is the creation of Ray Dalio, the founder of Bridgewater Associates, one of the biggest hedge funds in the world. According to Mr Dalio, there are only four scenarios that can affect the value of your investments. They are as follows:1. Inflation – The increase in the price of goods and services or rising prices2. Deflation – The decrease in the price of goods and services or falling prices3. Rising economic growth – Flourishing economy or higher than expected economic growth4. Declining economic growth – Shrinking economy or lower than expected economic growth
Ray Dalio suggested constructing a portfolio with assets that would perform well in each of the above scenarios. The result is a diversified portfolio of Stocks, Bonds and Commodities. Performance of All-Weather portfolio in previous financial crashes:
- Great Depression – when back-tested during the Great Depression, the all-weather portfolio was shown to have lost just 20.55% while the S&P 500 lost 64.4%.
- In 1973 and 2002, when S&P suffered some of the worst losses, the all-weather portfolio made money.
Do not time the market but look for clues
I wish I had a magic bullet to protect your investments from market crashes. I don’t. But I want to help you protect your investments. COVID-19 has changed our perception of market volatility, but there are a few things we can look for to prepare ourselves.
Daily infection rate or growth factor of daily new cases: Growth factor is the factor by which the daily new cases number multiplies itself over time. A growth factor of 1.07 means the daily new case is growing by 7%. More than 1 indicates signs of increase, whereas less than one indicates decreasing levels. If the number stays below 1 for an extended period and continue to move towards 0, then there is a high likelihood that the market will improve. During the SARS crisis in 2003, the stock market bottomed a week after the daily infection rate topped out.
Fear Index: The current epidemic is anything like before, but there will be indications of revival. Stock market declines often coincide with VIX index spikes. Previous outbreaks of SARS in 2002-03 pushed VIX to 41. Global Financial Crash in 2008 spiked VIX to 79. As of March 24, 2020, VIX, is at 55. Before buying any stock, I would expect VIX to fall considerably. No one can predict when the market would bottom, but you can look for clues to give yourself a head start in building a better portfolio.
Key to better portfolio performance
The All-Weather Portfolio consists of 30% Stock, 40% Long Term Bonds, 15% Intermediate-Term Bonds, 7.5% Commodities and 7.5% Gold. The portfolio maximises diversification, minimises volatility and improves performance. Higher allocation of bond in the portfolio is to balance the volatility from Stock and Commodities as bonds are negatively correlated to stocks. Timing the market is fool’s errand. Buying when the valuations are right is key to better portfolio performance.
How much is the company worth? Shall I buy shares now or shall I wait? If you do not know how to value the company correctly, you could make a costly mistake on your investment. Valuing a company is not an exact science Generally, the value is calculated using past...Continue Reading
How much is the company worth? Shall I buy shares now or shall I wait? If you do not know how to value the company correctly, you could make a costly mistake on your investment.
Valuing a company is not an exact science
Generally, the value is calculated using past data from the balance sheet and future assumptions of the broader economy. Investors analyse a stock with a different outlook, which results in different prices. To value the company correctly, investors should give greater emphasis on previous information and rely less on their instincts.
There is no absolute value
Different valuation models explore different scenarios, resulting in different prices. Because Benjamin Graham formula looks into earnings only, it is ideal to value defensive companies. The recipe will not be useful to identify growth companies.
Therefore, if you want to find growth firms, you should use a different method.
The original Benjamin Graham Formula is incomplete
The original formula to find the value of the company was:
V = EPS x (8.5 + 2g)
V= Expected value per share of the firm
EPS (Earnings per share) = the company’s last 12-month earnings per share
8.5 = P/E (Price to Earnings) ratio for a no-growth company g = long term growth rate of the company (7-10 years)
The original formula doesn’t take into account capital expenditures (i.e. money spent by businesses to maintain fixed assets and equipment). An illustration will help you understand.
Let’s assume there are two firms (Digital Media Co. and Construction Co.). They both have earnings of £1,000,000, but Digital Media Co. has a capital expenditure of £200,000 whereas Construction Co. has a capital expenditure of £800,000. Please see the comparison below:
|Digital Media Co.||Construction Co.|
|Total Number of Shares||10,000||10,000|
Value of Share (BG
According to Benjamin Graham Formula, both companies are equally valued, making it difficult to choose the right stock. Assuming all else the same, Digital Media Co. is a better proposition than Construction Co.
The second issue with the original formula is that it ignores how much the firm is leveraged (i.e. Financed by debt). An illustration will help you understand.
Let’s assume we have two firms (Lehman Bros Co. and Microsoft Co.). They both have earnings of £5,000,000, but Lehmann Bros Co. has a total debt of £1,000,000 whereas Microsoft Co. has only £200,000 liability like below.
|Lehman Bros Co.||Microsoft Co.|
|Total Number of Shares||10,000||10,000|
Value of Share (BG
Based on Benjamin Graham formula alone you will be tempted to buy the highly geared Lehman Bros.
The third issue with the original formula is that it was based on 1962 AAA corporate bond rates. To adjust the formula to today’s bond rates, we can adjust Graham’s formula to:
IV = [EPS x (8.5 + 2g) x 4.4] / Y
V= Expected value per share of the firm
EPS (Earnings per share) = the company’s last 12-month earnings per share
8.5 = P/E (Price to Earnings) ratio for a no-growth company g = long term growth rate of the company (7-10 years)
4.4 = the average yield of AAA corporate bond in 1962 when the model has introduced Y = the current yield on AAA corporate bonds
10 Point Filter Method
To discover remarkable companies using the revised Benjamin Graham Formula, I would recommend the 10-point filter method.
The 10-point filter to find remarkable firms are:
- Filter shares that have high-profit margins
- Has market capitalisation more than $500 million
- Current assets should be twice the current liabilities
- Long-term debt should not exceed the net current assets
- Regular dividend payments
- The minimum increase of at least one-third in per-share earnings
- Current share price should not be more than ten times the average earnings of the past three years
- Current share price should not be more than 1.5 times the book value
- Regular earnings growth yearly
- Buying Level: the intrinsic value of the share using the revised Benjamin Graham Formula
Limitations of the revised formula:
- Companies that have missed dividend payments recently will be not selected
- Some reliable companies that have low-profit margins will be excluded from the final list
- Firms that might have missed earnings growth due to the economic downturn will also be
Like any method, care should be taken on how you use them and your risk appetite. If you want to invest long term in defensive sectors, then I would recommend Benjamin Graham Formula with the 10 point filter method.
There is no single investment opportunity or asset class that can promise consistently high returns all the time. Many argue that real estate has always outperformed and is a good hedge against inflation. But done at the wrong time and real estate investing doesn’t...Continue Reading
There is no single investment opportunity or asset class that can promise consistently high returns all the time. Many argue that real estate has always outperformed and is a good hedge against inflation. But done at the wrong time and real estate investing doesn’t work.
According to the Federal Reserve Bank of San Francisco report, The Total Risk Premium Puzzle, the annual total return of UK Real Estate averaged at 7.63% for the period from 1963 – 2015 whereas, the annual total return of UK Stocks and Shares for the same period of 8.74%.
Price and Time
There is no good or bad investment but good or bad price and time of investment.
Selecting good companies does not guarantee superior returns. See – Cable and Wireless, Xerox, British Steel, Thomas Cook, and Blockbuster. Great investment decisions are based on two things – Price paid for the stock and the time of purchase. No company is so good that it cannot be overvalued or so bad that it cannot be undervalued.
What is most important in investing? It is not knowledge or strategy, but it is the discipline.
The riskiest thing to do is to buy something when everyone else is buying. All the information has already been factored in the price. You want to participate in an auction where there are only 2-3 bidders rather than hundreds. You want to buy something when it is not discovered. The most profitable thing to do is to buy something when no one is keen on buying it.
Your best bet is to be a contrarian investor.
There is no undervalued stock that is known by everyone. If everyone knew it, then why the price has not gone up? The bottom line is to buy when no one else will.
If everyone likes it, sell; if no one likes it, buy.
As Warren Buffet said, “the less prudence with which others conduct their affairs, the greater prudence with which we should conduct our own affairs.” When others are afraid, you needn’t be, when others are unafraid, you better be.
After Lehman’s collapse in 2008 in the great financial crash, everyone was afraid of financial stocks. The market rewarded contrarian investors who waited patiently and bought financial companies in 2009. Contrarian investors find opportunities that offer the right balance of return and risk.
Retirement has changed quite a bit in the last few decades — instead of retiring at 65 with a life expectancy of about 10 more years, most are finding themselves retiring either much earlier or much later than 65 with a life expectancy of at least 85 (occasionally...Continue Reading
Retirement has changed quite a bit in the last few decades — instead of retiring at 65 with a life expectancy of about 10 more years, most are finding themselves retiring either much earlier or much later than 65 with a life expectancy of at least 85 (occasionally even longer, in some instances). This complicates everything from longevity risk (also known as the depletion of assets before the end of life) to fewer retirement benefits to added healthcare costs and all sorts of other factors in between. Thankfully, there are ways to make sure that the stress of a transforming retirement field doesn’t get too overwhelming for modern retirees.
Make Your Retirement Plan
First and foremost, you are going to need an effective and thorough retirement plan. Still, a fairly new retirement concept, creating an income plan for your retirement fund is basically like budgeting. There simply wasn’t a need for this sort of planning before the late 2000s — up until that point, the belief was that retirees would be set for life if they invested and sold shares each month to use for their income. This just won’t do for today. Unless you have millions saved, a retirement income plan is an essential thing to have so that you can space out your money over time and not run out.
Evaluate Your Stocks
In the past, future retirees could bank on stocks and bonds to get them through retirement with ease. Today, with the current market constantly fluctuating and future profits made on stocks and bonds expected to be significantly lower compared to decades past, the same sorts of investments that secured a comfy retirement for former generations can no longer be your safety net. Diversifying income sources by looking into alternative investments and side jobs is the new move — this kind of investment is called cash flow investing and it will be the future of retirement income plans.
Don’t Rely on Your Pensions
As with stocks, it’s not reasonable to expect to live off of pensions alone anymore. While still considered a guaranteed source of income, defined benefit pension plans from employers are on their way to being a thing of the past. They’ve seen massive cuts in recent years and are facing billions in potential underfunding, which means that retirees should consult with their financial planner to figure out backup plans into their retirement plan in case their pension ends up coming in as less than what was expected.
Increase Your Income
To maximize your retirement spending, you must first make sure you maximize your income. Thankfully, there are quite a few ways to do this: Work for at least 35 years and make sure you are always pursuing opportunities to increase your income while you’re working by pursuing side jobs. Don’t retire before you reach your full retirement age and deny retiring until at least age 70. This will ensure the most retirement income possible for you.
Back-Up Your Healthcare
Health costs aren’t getting any cheaper, which means that future retirees need to make sure they plan for the inevitable medical bills as they form their retirement plans. This may be surprising to some, but not everything is covered by the NHS. The last thing you want is to be caught up in a medical emergency that completely throws off your carefully-planned retirement budget. Things like dental care, cosmetic surgeries, eye exams, hearing aids are not always going to be covered and may have to come out of pocket. You need to set aside emergency funding just in case something unexpected arises.
Check Your Life Insurance
In a similar vein to the precautions you need to take with your healthcare, it’s vital for you to check over your life insurance plan to ensure you’re covered in case of the worst. Likewise, it’s a good idea to check and see if your life insurance policy has accrued any monetary value that you can withdraw and use as a form of retirement income. Plus, as long as you withdraw less than your premiums, the money isn’t taxed. Only a fraction of U.K. citizens have a life insurance plan, so if you don’t have one, you should get one.
Check Your Pensions
The main problem with pensions today is the same issue that many have faced with their stocks and bonds: the course the market has taken (and the course it’s expected to continue following down in decades to come) has transformed the concept of a pension plan from a dependable source of income in retirement to nothing more than a glorified rainy day fund. Because of this, it’s highly recommended that future retirees pay more attention to their personal savings and other cash flow investments instead. Meet with a financial advisor to determine if you need to supplement your pension plan.
Check Your Individual Savings Account
The big difference between a pension and an Individual Savings Account (or ISA) is that the former is opened by the employer while the latter is opened by the individual. Like a pension, though, there are certain rules that restrict your contributions and keep you from enjoying the full benefits of your ISA. Consult with your financial advisor to make sure that you aren’t potentially going to be locked out of the benefits you thought you were guaranteed.
Look Into All Types of ISAs
There are five main types of ISAs: cash ISAs, Help to Buy ISAs, innovative finance ISAs, stocks & shares ISAs, and Lifetime ISAs. All can be beneficial, but not all will be one-size-fits-all. Some are for first-time buyers, some are more suited for more seasoned purchasers, and some are brand new and may be better for you than the one you currently have. Do your research and meet with a financial advisor to make sure that the ISA you’re set up with is the right one for you and suits your particular lifestyle.
Reduce Your Living Costs
Buying your home early and reducing your cost of living well before you hit retirement age are two of the smartest things you can do to help make your retirement go much more smoothly. Not having to cover payments for your home and learning to live well within your means will ensure maximum comfortability once you’re out of the workforce and into the life of luxury. This will leave much more money for travelling around the world, relaxing at home, and simply enjoying your retirement to the fullest, stress-free.
Different countries use different currencies — it’s a simple truth, but it’s one that many of us take for granted. You see, those different currencies each carry a different (and ever-changing) exchange rate based on the current value of one unit of a given country’s...Continue Reading
Different countries use different currencies — it’s a simple truth, but it’s one that many of us take for granted. You see, those different currencies each carry a different (and ever-changing) exchange rate based on the current value of one unit of a given country’s currency. The United States has the dollar, the United Kingdom has the pound, Europe has the euro, but none of them has the same value — for example, one dollar is currently worth more than one euro, but one euro is currently worth more than one pound.
If you play your cards right, you can end up exchanging and exchanging and exchanging until you end up profiting from your exchange. Forex trading, or foreign exchange trading, is one of the most accessible day trading markets out there because of the simplicity of this concept. All it takes is a computer, a couple of hundred dollars, and an internet connection to buy, sell and trade foreign currencies in an effort to walk away with more than you put in. However, this is not a guarantee of a quick income. Many forex traders end up losing money instead of making it. There are ways to avoid this, though.
Losing Money? Stop Trading
First and foremost, the obvious needs to be said: If you can’t seem to stop losing money, then stop spending it. There are two ratios that are key to forex trading, and they’ll be your guide as to whether or not you need to give it a rest for the day: your win-rate, which is a percentage of how many trades you win, and your risk-reward, which is a ratio of how much you win relative to how much you lose. An ideal win-rate is 50% or above, while an ideal risk-reward ratio is 1 or above.
A win-rate of 50% and a risk-reward of 1 means that you lose as much as you win, effectively cancelling everything out. If you’re successful, you’ll see a win-rate well above 50 and a risk-reward that surpasses 1.
Don’t Let Your Eyes Grow Bigger Than Your Wallet
Forex trading is so popular because it has such a low entry barrier — really, anyone with more than a few bucks could stand to win (even if they wouldn’t be winning very much at all with such a low investment). However, this also means that there’s a greater potential for your eyes to become bigger than your wallet. To be truly successful at forex trading, you must first establish a risk management strategy that defines just how much of your money you’re willing to risk. The standard belief is that an investor should never risk more than a few percentages of their capital on any given trade. Likewise, an investor should set aside a given percentage of their wealth that they can afford to lose.
Of course, there will be times where you get the urge to completely ignore these percentages and risk much more than you’d normally be comfortable with. Referred to as “going all-in,” this incredibly risky practice has the potential to completely upend your risk management strategy and result in you losing far more than you’d ever be comfortable with otherwise. It’s best to resist the urge and stick to your percentages, no matter if you’re having a good day or a bad one.
Don’t Try to Get Ahead of the News
Typically, when one part of the market moves, another is sure to follow suit. It’s like Newton’s Third Law of Motion: for every action, you are guaranteed a reaction. In forex trading, these actions are usually based around scheduled economic news. As a result, many traders will try and get ahead of the news and buy or trade accordingly in an attempt to either soften the blow or maximize the profit. Don’t do it.
The price is almost definitely going to move sharply up or sharply down in the wake of a big news release. It’s best to avoid getting caught up in the extremes and stick to a strategy that gets you involved in trading after the release.
Choose the Right Broker
Getting a broker involved could be the greatest choice or the worst mistake you make in forex trading. The right one could help your profits soar to new heights, while the wrong one could see your money completely disappear. Plus, if you end up getting scammed by a fraudulent broker, the outcome could be even worse.
You need to take the time and devote attention to choosing the right broker. Consider these factors to help make your choice easier: What do I want to accomplish? What is this broker offer? Are they using reliable sources for their referrals? Once you decide, you can take additional precautions by testing the broker with small trades at first. Of course, you should also avoid brokers that offer bonuses to you.
Don’t Trade Aimlessly
Lastly, and perhaps most importantly of all, you need to make sure you are trading with purpose. Trading aimlessly and without any sort of risk management strategy is probably the worst mistake a forex trader could possibly make. Create a written document that clearly outlines your strategies, spells out your risk management plan, and details your ideal win-rate and risk-reward ratios.
Jumping headfirst into forex trading without a plan or clear outline will only result in immense loss and abject failure. Understand the risk involved, develop heaps of patience and plenty of self-discipline, and — above all else — the skills necessary to succeed. If you keep losing money or can’t seem to find your footing in the forex trading market, then perhaps it’s a sign that it’s not the right investment for you. There’s no shortage of other opportunities out there, so don’t take it personally. Just make sure to always take precautionary measures.
What are alternative investments? To put things simply, an alternative investment is anything that is not a traditional investment in the mainstream market. In a traditional sense, the mainstream market usually means shares and bonds. Popular alternative investments...Continue Reading
What are alternative investments?
To put things simply, an alternative investment is anything that is not a traditional investment in the mainstream market. In a traditional sense, the mainstream market usually means shares and bonds. Popular alternative investments are private equity, venture capital, real estate, commodities, and distressed debt, but the list can really seem endless.
Venture capital involves providing funding to startups in the very early stages of development with the belief that the up-and-coming company has the potential for immense growth. Normally, the belief is that a venture capitalist should look for a business offering a product or service with low competition, high market demand, and high-income potential. This is called your ideal profitable niche. Investing in real estate today is going to involve some more strategy (and risk) than usual. Rates are low, which means that interested investors can put little money into a ramshackle home, bring it up-to-date, and sell it for a huge profit. Commodities have been proven to bring in some incredibly large returns when compared to the relatively low price paid initially, but these sorts of investments should be made with the assumption that a return won’t be seen for a decade or longer.
An alternative investment is not the same as a hedge fund
Odds are you’ve heard of a hedge fund but aren’t exactly sure how you’d define one. Hedge funds are just a different name for an investment partnership with the freedom to invest serious amounts of money in a wider variety of options than your traditional mutual fund. Typically, hedge funds are comprised of a professional fund manager and a group of investors who pool their money together to maximize profits. In recent years, though, this definition has shifted.
In fact, hedge funds now lack any clear definition due to a variety of permissible asset classes in such funds. A few decades ago, hedge funds were known for aggressive investing styles, going long and short in common stocks (i.e. mainstream market). Today, contrary to the name, some of them do not even hedge their positions in their portfolio. Therefore, it is not easy to label hedge funds as an alternative investment.
Is alternative investment a good thing?
In truth, there is no such thing as a good or bad investment. It’s all about how well the investment is valued for a potential return (also known as profit). If there is an alternative investment that is priced with a comfortable margin of safety, then it is potentially a good investment. Think of it like this: When an investor buys a share in the market, they hope the market keeps going up. When an investor buys an alternative investment, they pray. This distinction is not without significance. The investor must do careful due diligence before investing in alternative investment. Again, it’s all about the investment’s valuation.
With that being said, alternative investments are not totally uncorrelated to the mainstream market. Alternative investments should provide better returns than the mainstream market due to the illiquid nature of investment and the exclusion of market risk. Alternative investment proposals often claim to deliver more stable and uncorrelated returns compared to the mainstream market, but does that mean that alternative investments always outperform the mainstream market and result in bigger profits? Absolutely not. It is unrealistic to expect that an alternative investment is immune to the overall economy and will protect investors during mainstream market declines.
Market condition is more important than market timing
The key to a successful investment does not lie in making sure the market timing is perfect, but rather in the real market conditions at the time of the investment. In other words, the secret to above-average returns is to buy the asset — whether it be a commodity, a piece of real estate, or venture capital — for far less than it’s worth. If investing through a fund, the better strategy is to invest in increments with managers who have consistently performed well, making them prove they have the ability to increase or reduce your investment size as your opinion of the overall market condition changes.
Take the 1990s tech boom, for example. Lots of private equity investments performed well, but eventually, the returns became lacklustre. Take this as a warning not to invest with top-performing managers that have done well in the past — it’s no guarantee for future performance. A better idea would be to diversify your investment with consistently well-performing managers in each field. Paying this kind of close attention to the market condition will pay off far more than putting all your energy into market timing.
What to look for before investing in alternative investment?
If you’re hoping to pursue an alternative investment, there are a few things you need to be on the lookout for. These tips and tricks will keep you from blindly investing and keep you on the path to a successful alternative investment.
- Make an investment that makes sense to you and has a sensible approach to investing.
- If investing in a fund, check the credentials of the managers and past performance. Their past performance should be consistent, otherwise, you’ll be taking a much larger risk than you should.
- Look for an investment that gives you the ability to increase or decrease your investments without much trouble.
- Always pursue well-defined exit routes — you can never be too careful.
- Make sure your investment has favourable fee arrangements.
- Resist the temptation to buy too fast and pay too much — if the investment is good, there will be an opportunity to increase it. Don’t rush things.
The Bottom Line
The process of investing in alternative investment will be time-consuming and challenging. At its core, it’s really no different than investing in a mainstream market: Prices are high and changes come fast. At the end of the day, no matter which alternative investment route you pursue, you should very seriously consider going down the path of at least one or two. Investors all over the country are diversifying their portfolio by seeking out alternative investments just like the ones detailed above. They’re risky, yes, but no more so than stocks or bonds. Investing with detailed analysis and discipline in a less orthodox field can make the journey exciting. Regardless of the alternative investment you choose to pursue or the amount of money you choose to invest in it, one thing is certain: the journey will be a real thrill.