Ian Thomas, Pilot Fiancial Planning
Invest, don't speculate!
I come across a lot of unconventional investment ideas: from classic cars to fine art and wine investment; the list is virtually endless. The common factor which connects all of these types of ‘alternative’ investment is that they are not financial assets in the traditional sense. Shares, commercial property, government bonds and so on, all have an intrinsic value which is based on investors’ assessment of a future income stream (dividends, rent, etc.). In contrast, the value of alternative investments is determined purely by what someone else is prepared to pay – and fashion is a fickle mistress.
Growing up, I remember my parents’ house being filled with the type of dark wood antiques which are now terribly out of fashion (according to the Antique Furniture Price Index, early Victorian antiques are only worth 44% of their peak value - even before inflation is taken into account). 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 type of investments usually goes along the lines of: ‘there’s limited supply and growing demand; prices can only go up!’ The clear lesson from history is unfortunately that prices can, and do, fall; sometimes substantially.
A further consideration is that, as most alternative investments are not valued on a recognised exchange, valuations can be highly subjective and investors can also find it difficult to realise their investment if they need access to the cash. 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 investment firms have collapsed in the past 4 years, losing UK investors over £100 million.
If you are considering investing, are you 100% sure of the provenance of the asset and the integrity of the seller? Do you have a particular expertise or insight in a given area? Are you qualified to spot a future trend, or a potential victim who is late to the party?
Some 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 are taking and, even where they took advice, were often poorly advised.
As a result, the Financial Services Authority has announced that UCIS will in future only be permitted to promote their funds to more wealthy, experienced or professional investors – a step which I warmly welcome.
In general terms, there is nothing wrong with investing in something you love, as long as the emotional and financial motivations are clear and separate. Would you still feel the same way about a purchase if it lost some, or even all, of its monetary value? If the answer is yes, then your motivation is not financial – that’s great! If not, then it’s advisable to tread very carefully and to discuss the detail with a regulated adviser who is well-qualified and, crucially, not incentivised to sell a particular product.
Done properly, life should be exciting, but investment doesn’t need to be. That is unless you particularly enjoy speculating, which of course is an entirely different matter.
If you have any questions at all about your savings or investments, or any other financial concerns, then Pilot offers a ‘second opinion’ service – just give me a call!
Contact Ian Thomas at Pilot Financial Planning:
08453 712 808, ian@pilotfinancialplanning.co.uk
www.pilotfinancialplanning.co.uk
Pilot Financial Planning 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.
First Published October 2012 By The Dart