Two of the worlds favourite investments
Commodities are an entirely different form of investment from bonds and equities. A commodity is a raw material, like an agricultural product or a precious metal, that can be bought and sold for a profit just like equities. However, there’s no dividend received from commodities so your return is entirely dependent on the commodity increasing in value.
As a private investor, you can easily purchase commodities through a stockbroker in the form of funds, and the most common commodity in an investor portfolio is gold.
Gold has been used as a form of financial transaction for thousands of years. It’s durable, easy to turn into coins and there’s a limited quantity available to use. In fact, if you took all the gold that’s ever been mined throughout human history and made it into a single block, it would be about the same size as 3 Olympic swimming pools!
Gold is a great diversifier for your portfolio because it can retain or increase its value in times of financial turmoil when the value of your stocks could be plummeting.
You can own gold directly as coins and bars, although you’ll have to pay storage fees. A better option is to invest in a fund which is backed by physical gold held in the custodian’s vault. These funds are usually a much cheaper way to own the yellow metal.
The last main investment we’ll look at is something you probably already own – property. If you’ve been able to purchase your own house and have been slowly paying off your mortgage then you’ve probably seen capital growth in the value of your house over the years.
The main goal for most people is to buy a house, pay off the mortgage, and then sell at retirement age. They can then downsize into a smaller house and pocket a lump sum to use towards retirement.
The downside is that all the while you’re repaying the capital loan, you’re also repaying the mortgage lender a hefty interest rate which can amount to many tens of thousands of pounds over the lifetime of the mortgage. This is one reason why it’s best to pay off a mortgage as soon as possible.
For the last 30 years, house prices have seen a generally slow and steady increase in value, with a couple of exceptions such as the crash of the early 90s when many people ended up having negative equity.
However, the prices eventually rebounded, especially in the South East of the UK, where prices have done very well thanks to the close proximity to London.
Don’t use your home as an investment
It’s been argued by many consumer groups that the main reason the UK has a housing crisis is because too many people view houses as schemes to build wealth. It can also be argued that lots of people have made some serious gains over the past few years by buying and letting second properties and then flipping them when the value has increased.
However, the government, as usual, has decided to close this avenue for building wealth by introducing extra taxes on buying second properties, as well as taking away some of the tax advantages that were previously available.
The days of becoming wealthy from property rental are now arguably over. Is it time to look for alternative investments?
Although I personally held a rental property in the past I’m now investing in a far easier form of property ownership – that of Real Estate Investment Trusts. You can explore the topic of REITs in this article.