With stocks, bonds and real estate looking shaky, where's an investor to turn?
A disaster prepper’s primer on really alternative investments
If you’re at a loss as to where to allocate your savings in 2021, you’re not alone. All the mainstream financial asset classes seem set for a fall. There’s a glaring disparity between the recent performance of the stock market and that of the underlying economy, leading many market veterans to brace for a second COVID-induced crash.
The bond market is no more promising: in a year-end note to clients, Scotiabank strategists stated, “We believe government bonds have the worst outlook and possess the greatest risk of generating negative returns” in 2021 as yields gradually rise and valuations erode. Real estate? Rents are flat to falling as foreign students and Airbnb guests are forced to stay away. That’s if you’re even collecting rent.
The same goes for all the other securitized assets you can buy, from derivatives to commodities to hedge funds. Those most fearful of a financial apocalypse are casting their net wider to more exotic stores of value, from cryptocurrency to whisky.
Here’s a starter guide to get a sense of whether such alternative investments may be for you. Buyer beware, though: none of these assets are as easily and transparently traded as financial securities. And that anecdote about the guy who made a killing in antique cars seldom tells the whole story.
Until a century ago, gold was a standard component in any well-off person’s portfolio. In developing countries such as India, it still is. The big problem, as Warren Buffett and many other champion investors point out, is that it’s dead money; it doesn’t produce any income. Outside of jewelry, dental fillings and a few high-tech applications, there’s no practical use for gold. But it’s still the most widely used substitute for cash, and amid central banks’ profligacy since the COVID-19 outbreak, it’s looking more dear against major currencies all the time. The same goes for other precious metals such as silver and platinum, though these more thinly traded elements tend to be more volatile.
Easiest way to buy: An exchange-traded fund (ETF) invested in physical gold like the SPDR Gold Shares (NYSEArca: GLD)
Deal friction: Low
Big risk: Global economic growth
Bitcoin, by far the most widely held and traded of the 1,500 or so cryptocurrencies in existence, shares a lot of characteristics with gold. Its supply is more or less fixed at 21 million units, whereas “cash is essentially designed to lose purchasing power every year,” says Mitchell Demeter, who installed the world’s first bitcoin ATM in Vancouver in 2013 and currently serves as president of online trading platform Netcoins. And with central banks printing money like never before during the COVID shock, there’s justifiable concern that inflation will soon erode the value of dollar-denominated assets but leave holders of alternatives like gold and bitcoin sitting pretty.
Bitcoin’s advantage over gold is that it’s easier to store, easier to send around the world and easier prove it’s real (whereas a gold bar can be tainted or faked). There’s even a growing ecosystem for putting cryptocurrency to work for a modest return, unlike gold, which just sits in a vault. Cryptocurrency leaves one big unanswered question, though. Gold has retained its purchasing power over millennia; roughly the same amount will buy a family home today as in the 1930s. Can bitcoin, which has been around for all of 11 years, possibly do the same?
Easiest way to buy: From an online exchange such as Netcoins, Bitbuy or Coincurve. You send the cash to the platform, typically by e-transfer, and the bitcoin or other units get deposited in a hardware wallet or digital wallet in your phone or in the cloud
Deal friction: Medium; a typical fee is 0.5 percent of the transaction amount
Big risk: Crypto has attracted unscrupulous players, highlighted by the downfall of B.C.-incorporated exchange QuadrigaCX after the founder’s suspicious death in 2019, leaving 76,000 account holders $169 million out of pocket. Vancouver city council has considered a city-wide ban on bitcoin ATMs on the grounds that they enable criminal activity. Some industry participants, including Netcoins, are lobbying for more government oversight that would reassure consumers
Even more than other alternatives, collectibles are a crapshoot. What people consider cool and valuable today may be more so tomorrow, or not at all. Take that most democratic of collectibles (pre-Internet, anyway), stamps. “We’re selling [Canadian] stamps from the ’80s at half the face value for putting on parcels,” laments Jim Richardson, owner of Western Coins and Stamp in Richmond. You’d have done far better holding onto your early gaming tech or Hello Kitty paraphernalia. Still, there will always be niches that buck the trend. For example, wealthy buyers who grew up in China in the 1960s are paying top dollar for stamps issued during the Cultural Revolution, Richardson notes. Since it’s hard to predict future demand—will vintage cars still be a thing when today’s 20-somethings without drivers’ licences hit their 50s?—the best advice is to choose collectibles in extremely limited supply.
Easiest way to buy: Dealers and swap meets, in person or online
Deal friction: Medium
Big risk: Living in smaller homes, people have less space to store and display their treasures
Alternative investments have their drawbacks, namely liquidity
The past 30 years have minted an unprecedented number of millionaires around the world, which has translated into a secular bull market for fine art. Works by blue-chip Canadian artists such as Emily Carr, Lawren Harris and Jean-Paul Riopelle, for example, have appreciated by an average of more than 7 percent a year, says Robert Heffel, co-founder and vice-president of Vancouver-based auction house Heffel Fine Art. “The art market has held up very well in the pandemic,” Heffel adds. “People have time on their hands and are pursuing their passions.” He recommends would-be art buyers bone up on a particular school or style, watch auction prices and “buy what you love”—it’s a buy-and-hold asset that will most likely be hanging on your wall a very long time.
Easiest way to buy: Work with a dealer to build a collection by an established artist. Or you could try the venture capital approach and look for a future star at the annual Emily Carr University sale
Deal friction: High; dealer commissions are typically 10 percent of the hammer price, plus taxes
Big risk: An economic depression that causes the suddenly broke to liquidate their heirlooms. For individual works, there’s a risk the artist remains obscure, loses cachet or becomes overly prolific
While the vintage wine market has gone sour in recent years, aged single-malt whisky is still on a run—in fact, it contends for the fastest-appreciating asset class of the past decade. The nature of the commodity is that it gets tastier, or at least rarer (whisky only ages in the barrel, not in the bottle), every year as a few more bottles of that Yamazaki 55-year-old get uncorked for some oligarch’s family wedding. The emergence of Japanese single-malt since 2000 has both competed with and grown the market for old scotch, but there are up-and-coming products and regions that may offer better value, such as bourbon and, believe it or not, Taiwan.
It’s got to the point that many of the most valuable bottles are never going to be drunk, says Vancouver whisky expert Nate Ganapathi, who runs the Instagram site @singlemaltdaily. “It’s looked at as art.”
These days, you can buy share units in funds—there’s a whisky ETF trading in Sweden—that own curated cellars. But where’s the fun in that? Ganapathi recommends starting with 18- to 25-year-old bottles of limited-edition single-malts that will set you back US$1,000 and up from a retailer or auction house in the U.S. or overseas (virtually none have a presence in Canada). “For Canadians to get involved in it, it’s very difficult,” he cautions. For British Columbians, there are onerous taxes for importing the stuff. One workaround is to get the auction house you buy from to store it for an annual fee. Another is to ship it to an Alberta address.
Easiest way to buy: Pick up a few bottles of Pappy Van Winkle 10- or 12-year-old bourbon from the BC Liquor Distribution Branch’s premium spirits release in November. Keep them stored in a cool, safe place where you won’t be tempted to crack one after a night out
Deal friction: High; auction houses typically charge buyers 10 percent and sellers 5 percent
Big risk: Theft, spoilage or breakage in transit and storage