Nontraditional Investing
by
Charles Lamson
Nontraditional investments are included in this analysis because you will hear about them (or already have) and you need the proper information to help you decide if any of these are for you.
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Hard Assets
Hard assets are further divided into two subcategories: real estate and precious metals.
Many people consider real estate an essential investment and will probably be offended at it being classified as nontraditional. They will certainly be offended to find it in the same category as gold and silver.
Here is Little's reasoning. Hard assets such as real estate and gold have been considered good inflation hedges. History shows that in periods of high inflation, money is driven to assets that have intrinsic value (like gold and real estate). When confidence in the money weakens (during inflation), investors have looked to convert paper money into hard assets (like precious metals and gold coins).
JUST A MINUTE
Inflation is when too much money is chasing too few goods. It is characterized by sharply rising prices with no apparent increase in product value. The result is that money is devalued, or worth less. For example, if you were planning to live on $2,000 a month in retirement, inflation might make that $2,000 buy only $1,700 worth of goods. Your standard of living would drop $300 per month.
While there are no guarantees that high inflation will not return, it seems unlikely. The Federal Reserve Bank, which controls the money supply, has shown it is willing to apply the breaks to the economy if it seems to be heading for an inflationary period.
If you take the inflation out of the economy, hard assets like real estate and gold do not appreciate very rapidly as a rule. Let us look at real estate.
Real Estate
We all probably know someone who bought the right piece of property at the right time for the right price and made a killing. The average real estate investor is more likely to own residential properties that are rented out.
On page 12 of his book, Alpha Teach Yourself Investing in 24 Hours, Little writes:
I know several people who have been doing this for years and have been very successful. People always need a place to live and the cost of home ownership is going to be out of reach for a number of potential renters. There are plenty of tax advantages as well.
Precious Metals
As for gold and precious metals, Little goes on to explain on page 12:
...I do not have much positive to say. If you believe the global economy is going to collapse any minute, then you may want to own gold. On the other hand, if our society falls apart at the seams, you will want to get out of town fast. Any quantity of gold is going to slow you down.
If you feel you need precious metals in your portfolio, Little suggests you purchase a mutual fund that invests in mining company stocks.
Lifestyle Investing
The other category of nontraditional investments Little calls lifestyle investing. This group includes art and other collectibles. Little says on page 13, "I do not want to even consider this investing, but Americans seem to have this need to find things that give us pleasure, and then turn them into a business."
He goes on to say:
If you love art, love it for its beauty and the pleasure it brings to you. Keep your baseball cards to share with your kids. We have managed to ruin just about every hobby you can think of by putting a price tag on it.
PROCEED WITH CAUTION
Collecting dolls as an investment is using a hobby for a purpose other than that for which it was intended. Stick with stocks, bonds, and mutual funds for your true investment needs.
Arabian horses are beautiful animals. Not many years ago, people were going crazy over them. Investors who would not know a stallion from a mare were bidding up prices through the roof. What really makes this nuts is that Arabian horses have no utilitarian value. They are not like race horses that can win money and breed champions.
Beanie Babies, Pokemon whatevers---you name it and Americans (and others) will collect them and drive up prices. If you want to collect or raise or trade your hobby, do so and enjoy it, but do not plan on retiring off your beer bottle collection or that black velvet painting of Elvis in Viva Las Vegas.
*SOURCE: ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 11-13*
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