Play Me Some Grunge – Alternative Finance and Investments
In the 90s, alternative music entered the fray with bands like Nirvana, Foo Fighters Pearl Jam, Sound Garden and the list goes on. They were positioned somewhere between rock music and heavy metal. It became affectionately known as grunge music. Many of those bands are still going strong today.
In finance, alternatives to the mainstream are constantly presenting themselves. So how do you approach them, and will they become mainstream?
Firstly, let’s look at banking and mortgage lending. Mortgage lending is becoming more and more risk adverse due to regulatory requirements for holding capital, and responsible lending codes. So, we are seeing banks narrow their appetite for what and who they will lend to. Some of which borders on ridiculous and misses what it should be targeted at.
Luckily, a number of non-bank players have entered the market that take a far more pragmatic approach to lending. You may think that non-bank lenders charge higher interest rates and are more shark like with their lending practices. Not so. You can get non-bank lenders with interest rates as low as 2.99%, and they move up depending on your risk profile. Risk profile refers to such things as how secure your income is, your credit rating and your account behaviour. For many self- employed people, they are a good option when the declared income doesn’t quite match your take home income after making adjustments for expenses. Sometimes, businesses also go through periods when income has been lumpy, but has since bounced back up to normal levels. Sometimes, life doesn’t go as planned. With the reserve bank indicating that it will move forward with it’s bank capital expansion plan, non-bank lenders will play more of a role in the market as banks reduce their exposure to risky assets (loans) to minimize their capital holding requirements and therefore their cost base.
With investments, there are also alternatives popping up all the time. More people are investing into crypto currency, private equity and having a go at Sharesies, an online investing platform. There are also Styles of investments that you can buy into such as disruptive funds. Funds that invest in businesses that are out to disrupt the norm. Investing in these can be a lot of fun and you can get some good rewards. However, these strategies can involve huge risk as your wealth can be highly concentrated in one, a few assets or even one sector (remember the tech bubble!!) (1). With Crypto currency, it’s not regulated, there is often no use for it, other than supporting criminal activity. You may as well go to the casino and put your money on black!!
A better strategy may be to look at putting a small proportion of your portfolio into a Disruptive fund, within an aggressive portfolio. That way if you win, you will improve your returns, if you lose it doesn’t sink you. One such fund we have access to has returned 92.02% over the last 12 months. This fund invests in Blockchain (the technology behind crypto currency), artificial intelligence, energy storage, Robotics and DNA sequencing. Is this sort of performance sustainable, no!! Long term share markets have delivered about 10%, dating back to 1927. Over the same time frame, small company shares and value shares have delivered higher returns, getting up to 13%. A fund that is highly concentrated like the disruptive fund mentioned, will not continue its performance, it may out perform the market in the short term. However, it will come with a very bumpy ride, and is not for the faint hearted.
The key to investing is understanding your tolerance and capacity for risk, then what your money is being invested in. That helps to ascertain whether you are being adequately rewarded for the investments you make. Where investors become unhappy, its usually because they invested in something that posed as conservative but was actually more risky than they were aware of, or they didn’t have the capacity to take the risk.
For example, buying a few shares on Sharesies for $500 is not likely to hurt if you lost it. However, putting $500,000 into a few shares on Sharesies would be a huge concentration of wealth for most people, and could end badly. Who remembers Pumpkin Patch? (2)
A good investment strategy is diversified across property, shares, bonds and cash and further across different sectors. It is then weighted across those depending on your tolerance and capacity for risk. Shares and property tend to grow well over time, but are more volatile, while fixed interest and cash, grows, but is generally a lot less volatile. So, if you have tolerance and capacity for high risk you may have more invested in shares and property and vice versa. Within that, depending on how much risk you are open to you can look to concentrate your portfolio even further, understanding that the more concentration there is, the more risk you are taking.
Disclaimer: This blog is meant to be informative and engaging, hopefully not a cure for insomnia. Please don’t take this as personalised financial advice. Discuss your situation with an Advisor.
- Posted by Isbister
- On October 9, 2020