Alternative investments – How to choose one that’s right for you
Did you know that millennials prioritise growing their wealth and tend to start investing earlier compared to the older generation? However, 42% are unsure about the best way to go about it.
Investing can feel intimidating if you’ve just started, are clueless about it, or are facing an economic crisis wrought by a pandemic. But it’s not all bad—uncertainties in the economy can also incentivise people to start investing.
For instance, Standard Chartered Bank Singapore noticed a 200% increase in trading volume during the height of the COVID-19 pandemic. Similarly, the Robinhood trading app in the US gained 3 million new users in early 2020, many of whom were millennials.
Overall, though, millennials are still generally overwhelmed by the options and lack knowledge of and experience in investing. Others are afraid of putting their hard-earned money into the stock market. After all, stocks are complicated, volatile, and risky.
But investing is not limited to trading in the stock market or equities and bonds—in fact, there are a myriad of ways to start investing. Consider alternative investments, which are financial assets outside of conventional investments like stocks, bonds and cash.
Alternative investments have been increasing in popularity for a few reasons:
- Higher return potential compared to traditional investments
- Broader diversification
- Ability to grow the risk and return profile
Every type of investment has its unique risks and various considerations. Some are relatively low risk and allow you to start with small amounts of capital, but others are the opposite. It’s crucial to understand how each asset works and whether or not it suits your objectives.
Here are some alternative investments and factors for you to consider when embarking on your journey as a millennial investor.
Try trading digital gold as a hedge against uncertainty
Many people place a high value on gold because it’s seen as a hedge against inflation and a safe-haven investment when other forms of currencies are fluctuating.
In today’s world, gold isn’t just about owning it physically—you can trade it through funds on a stock exchange or through trading apps.
What is the time commitment?
Short to long term
Gold can be an excellent short-term investment to turn profits quickly, but investing in gold in the long term can also be lucrative. Ultimately, it depends on your financial goals and how much money you’re willing to invest.
Gold prices are largely dependent on sociopolitical issues that affect the economy, especially that of the USA. As gold is priced in US dollars, gold prices tend to rise when the US dollar falls.
How much money do you need?
Low (<$500)
You don’t have to put in large amounts of money when investing in gold. You can start small—in fact, the best gold trading app provide ultra-low investment opportunities with a threshold of 0.01grams, which is about USD 0.60. There are no extra fees to pay, so you can withdraw cash from your account and enjoy the full profit.
What are the risks involved?
The risk of trading gold is relatively low. The value of gold is dependent on public exchanges and determined by demand and supply.
Gold prices may fluctuate at times but the metal is still generally valued at a high price, and many predict that it will continue to climb in the future. Gold may rise during an economic crisis but ease when the economy recovers.
How do I start investing in it?
Online trading platforms are a great way to start. Gold brokers allows you to buy and sell gold online conveniently through their trading app—you can trade on-the-go at any time. You can even check gold prices with their live gold chart and monitor your investments in real-time.
Is it right for you as a millennial investor?
Gold is a great way to start your investment journey as it is a low-cost investment with relatively low risks. You don’t have to worry about needing a high upfront capital to start, and it’s a way to gain knowledge of how investing works.
Furthermore, gold is also an entirely different asset class, and it’s suitable for diversification of your investment portfolio when other asset classes don’t fare well.
Diversify your portfolio with Exchange-Traded Funds
Exchange-Traded Funds (ETFs) are a basket of securities that trade on stock exchanges. An ETF reflects the performance index of the top companies listed in the stock market.
For example, if you’re planning to invest in a local ETF, the index will be according to The Straits Times Index (STI) ETF, which is a list of 30 biggest companies on the Singapore Exchange. After observing the list of companies, you can decide to invest in an ETF by buying units in the ETF, and gain investment returns if the index is higher than what you invested.
What is the time commitment?
Medium to long term
It may be suitable for short-term trading, depending on your financial objectives. Still, it would be better to invest your money in a mix of ETFs for a more extended period to grow your portfolio and reap more benefits.
How much money do you need?
Low (<$500)
Investing in ETFs is an excellent way to start your investment journey because of the low cost and the ability to buy and sell them on the stock market.
You don’t need a lot of money to invest in ETFs as you don’t have to pay a fund manager to buy and sell on your behalf. But if you do prefer hiring a fund manager to manage your ETFs, you would have to pay management fees.
When you trade ETFs, brokers often charge a commission for each trade. But when investing in ETFs, investors only have to perform one transaction to buy and another to sell, which means fewer broker commissions and hence, lower purchasing cost.
What are the risks involved?
The risk of trading ETFs is relatively low. You’re able to diversify your investment portfolio, which means that you can spread your risk across various companies by investing in a mix of ETFs. By doing so, you reduce your risk of losses from cyclical downturns in a specific sector.
Every quarter, STI will review the companies listed, so you can assess investability every few months.
How do I start investing in it?
You can trade ETFs online via brokerage platforms. Remember to find out the fees you have to pay to the broker before starting your investment.
Is it right for you as a millennial investor?
ETF investments are low-cost capital investment products that you can start with if you’re relatively new to investing. You don’t need a lot of capital, but you should also check if there is minimum funding required.
Put your money in a Real Estate Investment Trust for low-maintenance trading
A Real Estate Investment Trust (REIT) owns and operates a portfolio of properties, and rents them out to interested buyers. REITs pool together investors’ money to buy different properties.
When a REIT rents out properties, the rental income is redistributed and paid out to investors who have invested their money in it.
What is the time commitment?
Long term
As they are dependent on interest rates, REIT prices may be unstable in the short term with interest rate fluctuations. It is much better to invest in REITs for extended periods.
How much money do you need?
Relatively low ($300 to $5,000)
REITs are a relatively low-cost investment product compared to buying an entire property.
What are the risks involved?
Investing in a REIT is low risk and offers relatively high dividends yield. It’s possible to yield 5% to 8% a year in dividends, which will be paid out quarterly or every six months. The law requires REITs to payout 90% of their earnings each year as distribution to unitholders.
How do I start investing in it?
You can start investing in REITs through online trading platforms. Before you start, you will need to open an individual Central Depository (CDP) account with Singapore Stock Exchange (SGX) and set up a trading account with a brokerage firm.
Is it right for you as a millennial investor?
Investing in a REIT gives you exposure to diversified property assets and requires a relatively small capital. It can provide passive income if traded well and without you worrying about monitoring the market every day. In contrast, investing in real estate involves purchasing a property to earn a return through a resale or rental income.
Attempt investing in a property for potentially high returns
What is the time commitment?
Long term
It would be tough to make any returns if you invest in a property in the short term. Usually, people rent out a property to make passive income because the returns are slower and spread out over some time.
How much money do you need?
Very high (~$200,000 to $2,000,000, depending on the property)
If you’ve just started earning an income or are still building up your savings, it would be difficult to invest in a property. Aside from the mortgage payments, you’ll need to invest time and money in maintenance and renovation, as well as in managing tenants if you’re planning to lease out your property.
What are the risks involved?
Investing in real estate involves medium to high risks, depending on the type of property you’re investing in. The location and age of the property are some factors that would affect your investment.
How do I start investing in it?
You can look up property listings on different websites. You may want to hire a real estate agent to help you out, but you will have to pay a fee.
Is it right for you as a millennial investor?
You should invest in property only if you have enough savings to cover the downpayment and can pay the mortgage while still being able to set aside some savings.
However, the risk of not getting any returns once you resell your property is high. If the property you’ve invested in depreciates over time, you risk facing a loss on the sale. With that said, you don’t necessarily have to invest locally—look overseas for an affordable house (e.g. Johor Bahru) is also an option for many young Singaporeans.
On the other hand, your property could also end up appreciating multiple times. If you have the financial stability to wait for a long time before reselling the property, then this investment could work for you.
Property investment is also desirable if you’re sharing the mortgage with your partner—splitting the cost of purchasing a property as a couple would make the investment more feasible.
Take a gamble with cryptocurrency investments
Cryptocurrency is a digital asset with transactions secured using cryptography. It is a relatively new form of investment that has gained traction over the past few years. Bitcoin is the world’s first decentralised cryptocurrency.
Cryptocurrency investment means trading on its price movements through a Contract For Differences trading account or buying and selling the coins through an exchange.
What is the time commitment?
Short term
Cryptocurrency is unpredictable and volatile, but its value has risen over the years. People may not want to invest in the long term because it’s possible to face huge losses. But if you have a high appetite for risk, you could possibly reap windfalls, too.
How much money do you need?
Low to high
There is no definite amount of capital you need to start investing in cryptocurrency. It can range from a few dollars to many thousands, depending on your financial situation and goals. Moreover, the value of cryptocurrency in relation to fiat money fluctuates frequently.
What are the risks involved?
Investing in cryptocurrency involves high risks. It’s also highly possible for you to be a victim of cybertheft and money laundering. However, markets like Singapore and Hong Kong have implemented regulations for cryptocurrency trading to ensure investability and reduce the occurrence of cybercrime.
How do I start investing in it?
You can trade cryptocurrencies like Bitcoin through online trading platforms. Singapore’s DBS Bank is looking to launch the DBS Digital Exchange, which will allow cryptocurrency to be traded against fiat currencies.
Is it right for you as a millennial investor?
If you’re new to investing, dabbling in cryptocurrency investments may not be the best option as it is difficult to understand. In addition, cryptocurrency is a speculative asset which means it has high uncertainties.
However, the high liquidity in cryptocurrency can also be an advantage over other types of investments if you’re looking for a short-term profit. You don’t need a broker to trade because you can simply buy and sell Bitcoin independently. If you’re an extremely tech-savvy millennial who understands the mechanics of trading cryptocurrencies, it’s possible to reap the benefits of it. Just keep in mind that investing in cryptocurrencies is like taking a gamble—it’s a high-risk, high reward portfolio.
How do I decide on an alternative investment?
Each asset comes with pros and cons, so never pour money into one without doing proper research and without assessing your current financial state and goals. Understand the risks involved, the capital required, and the time commitment needed for each type of alternative investment.
Keep in mind that all investments are at least a bit of a gamble, as no one can entirely predict the future. The best route is to consider if the risk inherent in each type of investment matches with your financial capacity and risk appetite, and whether it will help you to achieve your financial goals.
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