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Prince Alwaleed Bin Talal Alsaud

Classical and Untraditional Investments

2011 Nov 30


Classical and Untraditional Investments

It is a lot said and written about investment in stocks and bonds, but what about other investments. Or other financial investments are basically related to stock or bond market in one or other way. If we are trying to find some less related investments we should think about completely different kind of investment.


Such investment may include tangible investments as real estate, paintings, wines, collectables or other investments. We should exclude real estate as a separate one. Real estate property is a classical market that is closely related to stock market and bond market. It is very large and popular investment market affected by the same macro economical events like stocks or bonds (main investments), so investing in real estate will not provide some serious fundamental diversification. If it will not, so it won’t give for you too much. 


Investment Correlation

What are interesting for us are investments that do not correlate with classical investment markets (as stock market, bond market, property market). Already the modern portfolio theory which is about to become classical investment portfolio theory had determined about importance of asset correlation. Correlation is the main key in investment portfolio. If the assets correlate less it means higher efficiency portfolio. The higher efficiency in portfolio means lower risk or higher return. There is no real difference between higher return and lower risk. Those two measures are the most important and equally important. 


That’s why correlation is the key criteria for investment results. If you will succeed to find investment that correlate less you will be awarded by better financial results. That is what every investor wants: to achieve better financial results. The accuracy of those results must be included to achieve adequate result.


But let’s get back to correlation. If we want to achieve low correlation or anti correlation for our investments, we may look for some untraditional sources. Those sources are mentioned in the beginning of this article. Of course you may succeed to find some good correlation between investments in classical markets, but that is another topic. 


Untraditional Investment

Untraditional markets can offer for some hidden opportunities. Of course, if you invest in some untraditional tangible assets and will believe that it gives you a guarantee of anti-correlation, you may get strongly disappointed. The thing is that when investment market is at a depression it usually coincides with troubles in economy. If economy will not have doubt stock market crash also will be not significant.


If stock market will come in to very strong bear market it must be some serious economical problems. If there are serious economical problems it means that almost everybody starts to feel those problems and if almost everybody does, it means almost all kind of assets are losing value because the need for cash is growing up. When the need for cash grows up everyone you needs it must sell something, and they are trying to sell assets that had depreciated the least. It would be not reasonable to get rid of the most depressed assets in prices if there are still expected rise in the future. 


So how to get that correlation which is so good for investment. You have to know the market of particular tangible asset market very well. Let’s take for example some specific product. Everybody knows that some sorts of wines can appreciate in value. But it does not mean that if you will go no to the wine shop and will buy a basket of wines, you will earn anything if to try selling those bottles after ten years. Of course you may get lucky and get more money because of inflation or higher excise taxes, but also you may get unlucky and those wines will get out of order and be worthless. Because at first, wines must be preserved at specific conditions, and that may cost additional money to you. The second thing, not all kinds of wines are appreciating in value and you must know about it. Actually you may make good profits from such investments only if you are an expert of it. If you are amateur your investment may bring you more loss than return. 


Don’t Get in Investment Bubble

Of course wine investment is only one example. Such investment may be represented by anything which usually appreciates in value. Sometimes even things that come in fashion very fast may look as good investment, but if are looking for true investment you have to be sure that fashion won’t end very soon and your investment won’t get penny worth. Such bubbles comes from time to time and I’m sure it will come again with the next technological revolution (we are in short period of it now). 


Read next article: Is Forex Trading Investing?


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