Your primary savings must be in traditional investments, anything additional can be in alternative investments of your choice
To say that we live in a technology-driven world is axiomatic. First-person view drone and virtual reality have brought excitement to our lives. The question is: Will new-age investments such as cryptocurrencies and non-fungible tokens (NFTs) bring the same enthusiasm to our personal finance? In this article, we discuss why traditional investments are appropriate to achieve life goals and new-age investments (or alternatives) are best kept in the ‘explore’ portfolio.
Traditional vs alternatives
Equity and bonds are considered as traditional investments. You can add real estate to this group if you accept the argument that people traded in real estate even before they invested in equity and bonds. All other investments are considered as alternatives.
This category has witnessed blistering additions in the last two decades — private equity, volatility-based products as well as wine and antiques for those who wanted to convert their passion into investments. And now, it is cryptos and NFTs.
Before you invest in alternatives, consider whether you are investing to achieve a goal or whether you are exploring avenues to get rich. Of course, all of us want to be rich, but only some are fortunate enough to become successful entrepreneurs or investors.
So, you may want to first set up a path to achieve your goals and then explore avenues to getting rich.
By goals, we mean buying a house and funding your child’s college education.
It is preferable to invest in traditional investments to achieve your goals. Why? For one, traditional investments have an established market and, therefore, are easy to sell. You can redeem your equity mutual funds because there are regulations in place to do so. For another, traditional investments do not exhibit the level of volatility seen in traded alternatives such as cryptos.
You can consider alternative investments as part of your ‘explore’ portfolio.
This as a portfolio where you invest in alternatives to earn higher returns or derive returns from non-traditional factors such as volatility and inflation. Investing in cryptos, NFTs and passion assets such as arts and antiques fall into this ‘explore portfolio’.
This means that your primary savings must be in traditional investments. Your additional savings can be in alternative investments of your choice.
You must, however, conduct your due diligence before investing in alternatives. This is important given the short track record for these assets and the continual development in process and technology to provide credibility to these investments.
Note that an asset’s price is based on its perceived value. You may buy, for instance, an NFT of the Magpie-robin, an endangered species that lives in Seychelles. These so-called ‘collectibles’ may be valuable when it catches collectors’ fancy, given that there will be only limited tokens sold by Nature Seychelles. But their price will depend on perceived value. True, even financial assets trade on perceived value, but there is an underlying cash flow as a reference point.
Bond investments have interest income; you can depend on company earnings to arrive at a stock value.
This provides some ground to justify the valuation process of traditional investments.
Exploring newer investment avenues is fine, but considering alternatives for your goal-based investments is quite another argument. You would do well to allocate not more than 25% of your total investments to alternatives as part of the ‘explore’ portfolio. Note that these investments could be illiquid; you may be forced to sell at a lower price based on the urgency with which you want to convert them into cash.
It will be interesting to observe how individuals who prefer the touch-and-feel of real assets such as land and gold embrace digital assets such as cryptos and NFTs. Only time will tell which will turn good — traditional investments set up to achieve your goals, or alternatives investments that have the potential to make you rich, or perhaps both.
(The author offers training programmes for individuals for managing their personal investments)
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