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Invest, don’t speculate!

There are a lot of unconventional investment ideas — from classic cars to fine art and wine, the list is endless.  The common factor that connects all of these ‘alternative’ investments is that they are not financial assets in the traditional sense.

Shares, commercial property, government bonds and so on all have an underlying value which is based on investors’ assessment of future income (dividends, rent, etc). In contrast, the value of alternative investments is determined purely by what someone else is prepared to pay.

Knowing whether someone will want to pay for it in the future is a hazardous game. Growing up, I remember my parents’ house being filled with the type of dark wood antiques that are now terribly out of fashion. In contrast, their G-Plan, 1960s Danish-style furniture (which ended up in the skip, I think) is now worth a fortune on eBay!

The sales pitch for these types of investments usually goes along the lines of: ‘there’s limited supply and growing demand; prices can only go up!’ The clear lesson is unfortunately that prices can fall… sometimes substantially.

A further consideration is that valuations can be highly subjective and investors can also find it difficult to realise their investment if they need cash quickly. Furthermore, the market is unregulated. This means that if anything goes wrong there is no possibility of redress. The BBC recently reported that 50 UK-based vintage wine firms have collapsed in the past four years, losing UK investors over £100m.

If you are investing, are you 100% sure of the source of the asset and the integrity of the seller? Do you have expertise or insight in a given area? Are you qualified to spot a future trend, or a potential victim?

Alternative schemes

Alternative investments such as fine wine, crops, timber, traded life insurance policies and green energy have been promoted heavily as unregulated collective investment schemes (UCIS) to ordinary, retail investors.  The market has exploded over the past few years and 85,000 people in the UK now have around £2.5 billion invested in these funds. Unfortunately, many of these people were not made aware of the risks they were taking and were often poorly advised.

As a result, the predecessor of the FCA (FSA) announced in 2012 that UCIS can only be permitted to promote their funds to more wealthy, experienced or professional investors ie people who really understand what they’re doing and buying.

In general terms there is nothing wrong with investing in something you love, as long as the motivations are clear and separate. Would you still feel the same way about a purchase if it lost some, or all, of its monetary value? If the answer is yes, then that’s great! If not, then it’s best to tread very carefully and to discuss the detail with a regulated adviser who is well-qualified and not incentivised to sell a particular product.

Life should be exciting, but investment doesn’t need to be. That is unless you enjoy speculating, which is an entirely different matter of course.

Ian Thomas is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.


About the Author:

Ian Thomas has over 25 years’ experience in financial services and has previously worked at JP Morgan, Fidelity, Old Mutual Wealth and AXA. In 2011 he established Pilot Financial, which offers integrated financial planning and wealth management services to private clients, together with workplace pensions and employee benefits advice to businesses. Ian studied at Universität Düsseldorf and the University of York and holds a BA (Hons) in Economics. He is both a Certified and Chartered Financial Planner and also a Chartered Wealth Manager.

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