Thinking Outsidethe Investment

BOXby Terry Hanley

Nontraditional investing has become a popular way to diversify among individual investors since the stock market crash of 2008.

The nontraditional, or alternative, investments being referred to are any investments beyond common money market products and mutual funds. These types of investments can pay off, but according to Centenary College professor of economics David J. Hoaas, Ph.D., a large return on these types of investments is rare.

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“Financially, it’s probably not a great idea,” said Hoaas. “Where you could say there would be some reason to do it is if you are interested in what you are investing in, if it also becomes a hobby. I am a member of the American Association of Wine Economists ... so I kind of have some knowledge of wine investing, but I don’t invest in wine because financially it’s not the best thing to do.”

Anyone with some money and an E-trade account can trade on the stock market without assistance from a professional. Individuals can control their portfolio while paying low transaction costs or brokerage fees using the myriad of low cost information available regarding those markets. According to Hoaas, nontraditional investments are the opposite.

“Any time you go to a nontraditional investment, the transaction costs become high,” said Hoaas. “For example, let’s talk about wine. There are a limited number of places where you can invest in wine. Most of those are in the UK, so you are dealing with an overseas brokerage house. There are a few places in New York, but not nearly as many as there are in the UK, so you are going to pay their fee. When wine, as an investment good, is bought and sold, it’s usually sold at an auction house. They’re going to charge a fee when there’s a transaction. You are probably never going to take possession of your wine investment so there is going to be a storage fee. Any type of appreciation in that wine investment is going to be eaten up with fees. Even if you make a positive rate of return, it is going to be very modest.”

Though wine is one of Hoaas’s areas of expertise, he also spoke about other types of alternative investments that are popular.

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LAND/RENTAL PROPERTIES

“I think land is always a good investment. Productive land, farmland, would be even better. If you are going to make money on rental property, it really is fortuitous if you can fix problems yourself. If you have to pay someone to keep up the property, it really eats into any of the profits you are going to make. So if you are able to put some sweat equity into that investment by doing work on the property both at initial rental and by keeping up the property, you can make some money in rental property. But if you have to pay the note and pay somebody to come and fix it, it is going to be tough to make some money.”

RENTING PROPERTIES THROUGH AIRBNB

“Usually we see that in what I am going to call a transient area, which is a vacation-type area. I was recently in western North Carolina, where I was renting an apartment for a week above a retail location and the person who owned it had his or her own home in the area, so if you

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are in a desirable vacation area, this is a definite possibility. Could I make money doing that in Shreveport or Bossier? No, I couldn’t. So where you can make money in this is in vacation-type areas where there are a number of people who want to come in for a short stay and want to get beyond the Hampton Inn. You have to be careful what market you purchase in when you do this. Colorado used to be a wintertime escape. The state of Colorado, all of the cities in Colorado have done a really good job of influencing tourism throughout the year –— biking, hiking, the whole deal. They are doing things to get people to come through that state more and more, and that really helps those people who have that vacation-by-owner rental property.”

CROWDFUNDING

“Crowdfunding works well if you have a noble cause. I think people like and are willing to put some dollars into noble causes. The beauty of crowdfunding is that you can get in as an investor

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at a pretty low level. There is some crowdfunding where a $20 bill will make you part owner. Obviously there is some crowdfunding where the thresholds are much higher, but most are fairly modest, which means returns are probably not going to be great. When I think about what my percentage return will be, it is not going to be very high, which again, is probably why I want to put my money into noble projects so I get this aesthetic feeling that I could help somebody. As far as making money at low-dollar entry points, I am not going to make a big rate of return if I am investing in crowdfunding.”

BROADWAY SHOWS/HOLLYWOOD MOVIES

“I don’t know if you could get into that for six figures. I think we almost have to cross the million-dollar mark to get into that. That is a big number.”

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THOROUGHBRED HORSES

“That’s an expensive market. It’s not movie or Broadway show market expensive; it is a six-figure market though. You know, we hear these stories like ‘I bought this horse for $5,000 and it won the Preakness stakes.’ Yeah, they bought that horse for $5,000, but they put hundreds of thousands of dollars into training it, feeding it, housing it, transporting it and getting medical care for that horse. That is a big number as well.”

Trusting companies like Merrill Lynch, JPJ Investments or King Poljak Group at Morgan Stanley as well as taking trading into your own hands are the safer bets according to Hoaas because there is so much data available that validates traditional investing. There is far less data when it comes to nontraditional investing.

“Traditional investments, or investing in companies that produce something all the time is still what I recommend for an investment strategy,” said Hoaas. “Can you make money in other investments? Yes. Have we heard of people making big dollars in these other investments? Yes. What we haven’t heard about are all the people who didn’t make any money. The person who bought the bottle of wine and it was a fake. There are people who have made some nice returns off of alternative investments, but most of them who did that were lucky … You have to be willing to be a collector, though you are collecting something that might allow you to merely break even in the future.”

Consulting with a financial advisor or other finance professional before investing money into an opportunity is advised. You should always know what you are putting your money into and how that investment fits into your future financial plans.

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