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Perhaps you keep telling yourself that you’ll invest when you have more money or that you’ll do it “someday.” Or perhaps you’re concerned that the markets are now fragile, so you’re sitting on the side-lines, waiting for a “better time” to invest. Alternatively, you may believe that you must become a hard-core specialist before you can accomplish anything with your money that approaches investing.
But here’s the thing: delaying it may cost you more than you realise. Experts estimate that 40% of people have lost money due to procrastination. If you wait to invest, you may miss out on some extremely significant financial advantages. In the long term, the sooner you put your money to work, the better off you’ll be.
Long-term economic growth forecasts are crucial for global investors. Equity prices are based on forecasts of future earnings, which are in turn based on forecasts of future economic activity. This dynamic implies that the same variables that drive economic growth will also boost equity values in the long run. Similarly, the predicted long-run real income growth rate is a crucial predictor of the economy’s average real interest rate level, and thus the level of real returns in general. The link between actual and prospective growth (i.e., the degree of slack in the economy) is a fundamental driver of fixed-income returns in the short run.
Asset Allocation: An inevitable step for successful investments
The asset allocation that is appropriate for you at any particular stage in your life is mostly determined by your time horizon and risk tolerance.
- Risk ToleranceRisk tolerance refers to your readiness to risk losing some or all of your initial investment in exchange for higher prospective returns. An aggressive investor, or one who is willing to take on a high level of risk, is more inclined to risk losing money in order to achieve greater outcomes. A cautious investor, or one who has a limited risk tolerance, prefers investments that will allow him or her to keep their original investment. Conservative investors preserve a “bird in the hand,” while adventurous investors pursue “two in the bush,” as the classic phrase goes.
- Time Horizon – Your time horizon refers to how many months, years, or decades you intend to invest to reach a specific financial goal. Because he or she can wait out slow economic cycles and the inevitable ups and downs of our markets, an investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment. Because he or she has a shorter time horizon, an investor saving for a teenager’s college education will likely take on less risk.
Letting go of traditional investments
Traditional investments like FDs already have seen starving interest rates. It will not be unrealistic to assume that soon there will be a time when instead of the bank paying interest on FDs the investors will have to pay the bank to keep their FD being in negative interest rates. Similarly, Mutual funds in maximum cases fail to give a hefty return, the way it is presumed. If we talk about stocks majority of the investors tend to lose money as the act of investing in stocks, bonds, etc. is driven by human psychology and not by numbers. Often investors tend to ignore macroeconomic factors like GDP, Unemployment, etc. We profoundly find investors to have an attitude of going with the flow resulting in over-valuation of a stock and at the end when the bubble bursts there are only tears.
Let’s say if you did run the numbers very carefully but the hardest fact to digest is that the stock market prices don’t only depend on the company’s performance. As we have discussed a number of times that macroeconomic factors are not in the control of any individual investor. Let us take a glance at the returns that the traditional asset classes have generated through a graph.
Traditional investments were the investors’ favourite since they appeared to provide security and comfort. However, they have a significant and generally noticed secondary effect: a tiny increase in wealth. The rate at which prices rise is referred to as inflation. According to the most recent estimates, India’s inflation rate is around 5% – 6%. This indicates that money loses 5% – 6% of its worth each year. After accounting for inflation, a 4.5% after-tax return on traditional assets will result in negative real returns.The falling interest regime that on for the last few years, drove quite a few of these investors towards Mutual Funds which still fails to provide an optimum return for investors.Following the recent market downturns, interest rate reduction, and the resulting impact on fixed deposit rates, many investors are now questioning if traditional investments are still a smart investment option.
Alternative asset classes for investments an opportunistic future
Alternative assets are less traditional and more unexpected investment options. Alternative asset classes include commodities, real estate, NFT (Digital Art), venture capital, private equity.
- Alternative Investments
- Venture Funds: It is money put into start-ups and small enterprises that have the potential to grow over time. It is a high-risk, high-reward investment that is often made by relatively wealthy people. Even more intriguing is the fact that most traditional venture capital funds are limited partnerships. This means that the money can only be invested once by the fund managers. They must refund the principle and gains to the venture capital fund’s investors if they make an investment and leave for a 3 to 4x return.
- Private Equity Funds: It is made up of investments made privately and not publicly traded. These investments are made directly into private enterprises by investors. Typically, this funding is raised to fund innovative technology or acquisitions. Success in the private equity markets necessitates a high level of risk tolerance and the capacity to deal with significant illiquidity.
- Unicorns: Unicorns were formerly depicted by ancient Greeks and Romans as being very quick and light on their hooves, with a horn treasured by merchants and investors. It’s a description that may also be used to today’s unicorn businesses. Investing in unicorns makes sense given low interest rates, continuous technological advancements, and new regulatory benefits. However, there is a contradiction to investing in unicorns: the availability of private equity makes them less likely to go public, yet their aversion to public markets makes their shares difficult to come by.
We have the expertise you need and the service that you deserve at Torre Capital, a VC-funded Singapore-based Financial Technology company. We are creating a fully digital Wealthtech to connect family offices and HNI investors with global opportunities, including alternative assets like Private Equity, Venture Capital, Real Estate Funds, and Hedge Funds.The table below consists of some of the PE/VC Funds with their IRR and Fund size.
- Real Estate
Commercial and residential properties, as well as REITs, are all examples of real estate. Real estate consists of land and anything permanently attached to it. REITs, or real estate investment trusts, are businesses that own and operate income-producing real properties. REITs provide investors with the chance to invest in real estate as a kind of financial stability. Transacting in REITs is substantially less expensive and time-consuming than transacting on properties. REITs make a lot more sense as an investing vehicle. Second, it provides investors with a new asset class outside of traditional stock, debt, cash, and gold, so helping to diversify risk. The returns generated by REITs are depicted in the graph below.
Collectibles / NFTs
NFTs are digital works of art that exist on the blockchain network and can take a variety of forms. Memes, video clips, images, music, and even tweets are some of the most popular forms of digital art. When you buy these tokens, just like any other investment, there’s always the possibility of your money growing in value. These digital treasures are non-fungible, which means they can’t be replaced. At the moment, blockchain technology is generating a lot of buzz. Some predict the technology will have the same impact on consumer behaviour as the Internet did. Now let us come to the prime question that is how much to invest in NFTs?
Honestly answering these NFTs (especially Digital Art) revolves around the concept that beauty lies in the eyes of the beholder. Hence when you buy something unique and the other person sees the same value in it and the demand increases the prices also shoot up. It will be wise to say that an investor can always explore this option with extra wealth.
In the last five years (ending 31 December 2020), the S&P 500 index of large-cap US equities has compounded at an annualized growth rate of 14.5% (in USD, net dividends reinvested); over the same time period, the price of bitcoin in USD has compounded at an annualized growth rate of 131.5%. Now if we consider Etherium it also has given a hefty return of 500% in 1 Year. If this still feels normal, then let’s talk about some astronomical figures like in the case of Dogecoin or Meme coin as it was named earlier has given a return of around 20000% in a year.
Apologies if you felt a minor heart attack after seeing these return figures.
It is also very important to note that the market is highly volatile and very unprecedented due to a lack of regulation. We are not unaware of the current scenario of Bitcoin and the way Elon Musk is affecting the market sentiments and indirectly controlling the prices, even the astronomical values that Dogecoin gave was also due to the SNL tweet by Elon Musk. You might still be wondering if you should invest in cryptocurrency or not!If we consider simple lottery tickets where nearly 1 lac people buy the tickets and the probability of winning the competition is 1/100000. Now If I ask you do you put all your savings to buy lottery tickets? The obvious answer is No. The reason it is has no backing and the uncertainty is infinite. We just intend to justify the psychology behind the investment by bringing in the example of a lottery. You should invest your money in crypto according to your risk appetite. The graph below shows the returns generated by Bitcoin and Ethereum.
- Digital Gold
Buying physical gold certainly has its downsides. There are issues of identifying its legitimacy and purity, then there are problems of safekeeping and storage. One more issue is that we are in the midst of a pandemic. It is not quite ideal to go out to gold dealers or jewellery stores. Digital gold, on the other hand, can be bought online and is stored in insured vaults by the seller on behalf of the customer. All you require is Internet/mobile banking and you can invest in gold digitally anytime, anywhere. You can take physical delivery of the gold at your doorstep. You can invest an amount as low as Re.1. Digital Gold can be used as collateral for online loans. Digital Gold is genuine and the purity is 24K, 99.5% for SafeGold and 999.9 in the case of MMTC PAMP purchases.
Your purchase is stored safely and is also 100% insured. You can exchange digital gold for physical jewellery or gold coins and bullion.Trading volumes of digital gold in India totalled four to five tonnes last year in India and have proved to be a new way of investing in gold. Let us take a glance at the returns that the gold market has generated through a graph.
The magic wand of diversification to minimize risk
Diversification is the process of dispersing money among several investments in order to lessen risk. You may be able to limit your losses and lessen investment return variations by selecting the correct set of investments without losing too much potential gain.
Furthermore, asset allocation is critical since it has a significant impact on whether you will reach your financial objectives. Your investments may not produce a significant enough return to fulfil your goal if you don’t include enough risk in your portfolio. For example, most financial experts believe that if you’re saving for a long-term goal like retirement or college, you’ll need to incorporate at least some stock or stock mutual funds in your portfolio. However, if you take on too much risk in your portfolio, the money you need to achieve your goal may not be available when you need it. For a short-term aim, such as saving for a family’s summer vacation, a portfolio strongly weighted in stocks or stock mutual funds would be improper. You may feel comfortable building your asset allocation model if you know your time horizon and risk tolerance, as well as if you have some investment expertise.
The art of rebalancing
Rebalancing is the process of returning your portfolio to its original asset allocation balance. This is crucial since some of your investments may drift away from your investment objectives over time. Some of your investments will increase at a higher rate than others. Rebalancing your portfolio ensures that one or more asset categories are not overemphasised, and it returns your portfolio to a reasonable level of risk. Let’s say you’ve determined that alternative investments account for 70% of your portfolio. Alternative investments, on the other hand, now account for 90% of your portfolio, thanks to a recent spike in returns. To re-establish your original asset allocation mix, you’ll need to sell some of your stock assets or buy investments from an under-weighted asset category.
Your portfolio can be rebalanced based on the calendar or your investments. Investors should rebalance their portfolios on a regular basis, such as every six or twelve months, according to several financial gurus. The advantage of this strategy is that it uses a calendar to notify you when it’s time to rebalance.
Others advise rebalancing only when an asset class’s relative weight grows or lowers by more than a particular percentage that you’ve determined ahead of time. The benefit of this approach is that your investments will alert you when it’s time to rebalance. Rebalancing, in either instance, works best when done on a somewhat occasional basis.
Never put all your eggs in one basket
Many people are hesitant to invest because they are afraid of losing money. A novice investor’s first question is frequently, “What if I lose everything?” While all investing has some risk, the fear of losing “everything” is unfounded if you choose wisely where to invest your “eggs.” A well-diversified portfolio should have two degrees of diversification: between asset categories and within asset categories. You’ll need to spread out your assets within each asset group, in addition to arranging your investments across stocks, bonds, cash equivalents, and maybe additional asset categories. Naturally, when you add more investments to your portfolio, you’ll incur higher fees and expenses, lowering your investment returns. As a result, while considering how to diversify your portfolio, you’ll need to factor in these fees.The idea is to find investments in parts of each asset class that may perform differently depending on market conditions. So Happy Investing!
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