6 Reasons Why Alternative Investments are Increasingly Popular

By Stephen Yong

Alternative investments including Bitcoin, P2P lending and gold are increasingly popular. Gain insight on what are alternate investments and its appeal for Malaysians. What are the risks and rewards for investing in alts.

What are Alternative Investments?

Alternative investments are called as such because these financial assets do not fall into the more conventional asset classes of equity, bonds, properties, or cash investments. Alternate investments can be further divided into subcategories such as commodities, private equity, collectibles, and cryptocurrencies. Typically, alternate investments do not form the core of your investment portfolio but instead form less than 10% of your overall portfolio.

Whether you call them as alternative investments, this asset class has been grabbing headlines. At the forefront is cryptocurrency with Bitcoin having skyrocketed to a new high above RM100,000 (USD25k) per Bitcoin. Another increasingly popular alternate investments include gold which has gained some new followers with FinTech now allowing you to buy fractional gold via an app. Lastly, we have P2P financing which allows investors to legally lend money to small businesses and entrepreneurs via an online P2P platform.

What is the Appeal of Alternative Investments?

Alternative investments are generally viewed as higher risk and higher volatility. These investments are also more often embraced by tech savvy investors who are comfortable with financial technology (FinTech). While older investors may shun away from investing online or via an app into an investment that talks about using a blockchain or fractional investing. Older investors may also have a preference towards more traditional investments such as stocks and property.

Blockchain: a digital ledger of storing information, often in a decentralised manner, with transactions duplicated across many different computer systems making it near impossible to hack or change.

Alternate investments, especially those powered by FinTech, have the following advantages:

1. More transparent with details of the investment available 24/7 on your mobile

2. Lower fees than more traditional investments with FinTech lowering costs

3. Higher potential returns for investors with a higher-risk appetite

4. Increased diversification having assets not correlated to the stock market

5. Higher volatility which is beneficial for traders to make higher gains

6. Keeping up against inflation better than most traditional investments

Alternate investments do have its own set of drawbacks and disadvantages:

1. Difficult to value as there’s less publicly available information or fundamentals to be analyzed

2. Illiquid if there’s no willing buyer or causing the spread to be wide reducing your returns

3. Volatility causing you to suffer losses if you are forced to sell your investment during a downturn

How do Alternative Investments Perform?

Accompanying the higher risk and volatility, alternative investments also enjoy potentially higher returns. For example, Bitcoin’s YTD (year-to-date) returns at point of writing is at 250% towering above most if not all other asset classes. YTD returns for gold is around 23%. While P2P financing returns can range from 10% to 18% according to data provided by P2P financing operators in Malaysia.

While alternative investments appear to be doing well, it is a double-edged sword with investments potentially going downwards significantly as well. For example, in the Great Crypto Crash of 2018 Bitcoin declined 80% from its peak which is an even bigger magnitude of loss than the dot-com crash. Gold is often falsely perceived as low risk as a safe investment during times of crisis. In fact, gold is highly volatile with an average volatility moving upwards (or downwards) of 16% a year! P2P financing investors on the other hand face risks in the face of rising default rates whereby borrowers are unable to pay and the losses affect investor returns.

What Do You Need to Know as an Alt Investor?

Investing in alternate investments does come with own fair share of risks and know-how. For example, a common question when investing in alternative investments is whether you will be taxed in Malaysia. Cryptocurrency is not taxed if you are not trading crypto as your primary source of income. However, for P2P financing, investors are required to declare gains and will be taxed. For gold investing if you are a Muslim, you will need to pay zakat, a mandatory form of Islamic obligation tax, if you hold gold above 85 grams. This applies even if you cannot see or touch the gold physically as halal gold must be backed up by actual physical gold to by Syariah compliant.

Let us narrow down into good rules of thumb for investing in these alternate investments. Bitcoin is a highly speculative investment with massive gains and drops thus you may want to hold no more than 5% of your investment portfolio in cryptocurrency. Of note as well is that cryptocurrency is not viewed as legal tender in Malaysia but there are 3 Securities Commission recognised market digital asset exchanges aka cryptocurrency platforms in Malaysia. P2P financing face increasing risk of defaults thus you may want to make sure you spread your risk across different borrowers (or even different P2P financing platforms). Do read up on the borrower’s financial information before investing in any P2P financing notes. Gold has its fair share of criticism as well as it does not generate any returns but is a good hedge against times of crisis. Do be aware of the gold spread, which is the difference between buying and selling price of gold, and any fees charged which will reduce your returns.

What Lies Ahead for Alternate Investments

Cryptocurrency especially is an interesting alternate asset to watch. Cryptocurrency is increasingly being viewed as a store of value thus earning a nickname as digital gold. Digital payment platforms PayPal and Venmo announced that they will support transactions in Bitcoin and other cryptocurrencies driving an increase in usage and liquidity. There is also growing institutional investors in Bitcoin as a reserve asset and an alternative to fiat currency such as USD which is showing a decline in value.

Overall, alternate investments are becoming increasingly popular with financial technology and slick shiny apps appealing to young and young at heart investors. Increased competition, lowered costs with fintech, and an increasingly global investment market will further spur growth in alternate investments.

6 Steps to Reflect on Your Financial Decisions in 2020

Reflecting on your financial decisions in 2020 is easier said than done. How to get started and prepare for 2021?

As each year comes to an end, we usually will reflect on what the year has brought – what we learnt from facing challenges, and how we celebrated successes.

Now, 2020 in all its glory was a truly challenging year for many, and so the act of reflecting on the year is even more important.

In 2020, many were forced to make significant financial changes, whether major or minor, depending on the changes with our surrounding environment and source of income. By being mindful is all about going through life with purpose and paying attention to the present moment. It has a place throughout our life as finances affecting every aspect of our lives and can make a real difference in our finances as well.

Other than checking our physical and mental health using mindfulness tools, these few steps can help you to bring a clarity in our financial space.

1. Be proud of the financial decisions you have made

Think back to the last financial decision that bring you closer to a goal, it could be increasing your retirement saving or diversifying your investment portfolio. Get in touch with how it felt to be getting on the right path. You are aware that you are capable and empowered to feel comfortable through all your financial decisions, be it small or big.

One research suggest that by having a positive mindset can influences our action to make better choices.

Get in touch with how it felt to be getting on the right path. You are aware that you are capable and empowered to feel comfortable through all your financial decisions, be it small or big. One research suggest that by having a positive mindset can influences our action to make better choices.

2. Don’t procrastinate on your financial actions

We all have that one things on our finances that we hate to do or cringe when we should do it. It could be looking at your monthly expenses and not liking the current spending or simply have to look for another investment portfolio. All these can tell us a lot about the management of our personal finances.

But when we resists or delay, it could lead to more issues in the future and could be harmful to your financial health. How do we want to tackle these issues? Figure out the underlying issues that drives your procrastinations and avoidance. Is it because you are not sure what to do first? Or you just don’t have the time for planning?

As you identify your issues and how to tackle it, a commitment have to be made in order to ensure that you can solve these issues. Consider engaging with a licensed financial planner to get a better look at your issues and helping hand in managing them.

3. Start tracking your spending

Everyone wants to achieve financial stability for the purpose of peace of mind and the ability to afford things as well as provide for our future generations. But often these goals feel like an unattainable and far-off goal. If you need some good financial housekeeping, please start with organization. Allocate a few hours in a week to review your finances details.

In this technology era, multiple apps provide a tools to help you organize your spending or investment that are user friendly. Not sure which application is good for you? Read our spending tracker applications review to read more on various types of finances apps. If you prefer doing things with paper and pen, don’t fret as you can simply track your spending manually by using finances worksheets. If you need some examples, just Google ‘personal finances and budgeting spreadsheet’ and voila, so many templates of worksheet to choose from.

If you feel that your spending exceeded your budget, consider cutting some of your leisure stuff and save that excess on your money jar or contact your financial planner to get a holistic look on your finances – actions like this are actually what make you present in all aspects of your financial health.

4. Assessing your long-terms goals

To meet your long-term goals, you need to do small things frequently. One of the obvious example is by having an emergency savings for rainy days. You might allocate RM10 everyday from your spending to any money jar located in your bedroom or even beside your washing machine (when you found a small changes in your dirty trousers pockets!). These small actions will take us sometime to be disciplined.

If you are afraid to invest in high risk investment, you might consider chatting with financial planner for better views on the type of investment for long-term planning. They can help to align your investment allocation with your life stage and risk tolerance.

5. Identify your next money milestones

Your money experiences are changing according to your life events. Big life events often come with financial changes (getting married, having baby, starting a business). Those big moments should come with detailed financial planning. Or, instead of “positive” money goals, you can encounter several moments you might not be able to anticipate, like retrenchment or sudden medical needs for treatment at health facilities.

The question is, how would you handle everything and what kind of changes you can do to be more prepared? Start listing down all the actions you think you should take before the event happening. Seek professional help if you are still unsure of the next step to be done.

6. Engage a licensed professional

Financial success doesn’t happen overnight. It takes effort and good knowledge to keep it afloat. Getting a financial advice from a licensed financial planner is a good start to evaluate your current financial standing. With holistic view of your finances and unbiased advices, you can get a better look for your financial planning.

You might feel intimidated by this first as finances topics is a sensitive subjects for most people and it is hard to open up about your financial situation to anyone, let alone a stranger but as a financial planners, their job is to help you feel at ease and comfortable during discussion on your next step in financial planning.

Conclusion

Setting new patterns in our financial action starts with understanding on how we got to where we are now. Who or what influenced your financial habits? Is it your family or your peers? Maybe you watched your mom saving some of her income monthly or your father limiting your spending for expensive gadgets and working to earn an expensive stuff. Whether it is positive or negative influences, they can be a foundation of things we do well and where we have room to grow. If you are in doubt, go back to the basic. Understand how to prepare for your retirement, assessing your current budget and get your debts under control.

How do you reflect on your financial decisions made in 2020?

5 Ways to Get Started on Your 2021 Financial Resolution

What financial goals are you looking to achieve in 2021? Learn ways to make your 2021 financial goals a reality.

Imagine your usual financial resolutions for the upcoming year.

Do you want to increase your savings? Diversify your investment portfolio? Be free of student loan or property debt? Or simply have more income streams to build wealth?

To accomplish any (or all!) of these, you will need to set up goals that you can work towards achieving it. Setting goals can help you prioritize essential or non-essential things in life.

Below are some financial goals broken into different categories:

Basic life and money goals

• Buy a home

• Remodel or repair your house

• Paying you debt, such as loans and credit cards

• Find a new job

• Buy a car for your growing family

• Build an emergency fund

• Donate some of your fortunes to charity monthly or annually

• Set a career goal: start a new business, expand a current one

Family-related goals

• Planning to get married

• Planning to have children

• College fees for children

• Leave the workforce (to raise a family, pursuing college education, helping old parents)

• Helping newly graduated children expenses

• Leave an inheritance for loved ones.

Retirement-related goals

• Increase your retirement contribution

• Retire from working full-time or retire early

• Moving to different place (lower cost of living, closer to family)

• Pay your mortgage before you retire.

Setting goals is one thing, and most of the people already have a clear sights on doing everything in their power, be it paying off student loans or saving more for retirement. But, transforming those dreams into reality is another thing.

But, with the pandemic, for some people, planning for your financial resolution can be overwhelming especially if you are affected by the retrenchment, loss of profits from business or pay cuts.

Taking this into account, here are 5 ways you can get started on your 2021 financial resolution, even in the new normal.

1. Join a support group

A support group or finding your tribe can be a great way to help you reach any goal. Nowadays, in the era of internet and vast reach of social media, you can find forum or group, free or chargeable to join. These kind of group can be a medium to share important information on personal finances.This will help to strengthen connections between members and build a true community around shared financial goals.

For example, we have our My Personal Finances Facebook group where we share and discuss on the latest updates on personal finances and investing with other members. Members can also ask questions and get opinions on financial questions. We encourage healthy discussion among members in a safe environment (while our mods battle spammers).

If Facebook groups aren’t your thing, there are other options, including listening to podcasts focused on personal finance. Even if you aren’t having direct dialogue, listening to experts discuss money insights and tips can help keep you focused on your finances—and you may learn a few things along the way.

2. Understand your goals

No one can deny the benefit of creating financial goals. But, if you don’t understand the inner workings of those goals, you will miss the opportunity to make great progress towards achieving them.

For example, your goals for next year is to pay your students loans. But do you know how your plan will works? Do you review the benefits you will get if you pay earlier and more than what loans expected? Where can your money go after you finish the loan? Leisure or increasing your retirement savings with the leftover money?

Having a solid understanding of how your financial strategies work can help you to make smarter decisions abour your money. Read up more about your loan, be it private loan from National Higher Education Fund Corporation (PTPTN) to understand how it works.

Not sure where to start? Read this article on 6 steps to clear your debt quickly

3. Take note of your credit record and score

It makes sense to review your credit score and pay close attention to the credit scores derived from Central Credit Reference Information System (CCRIS) report when your financial goals involved buying a new car or property. Having a strong credit score can help you to make your loan application have higher chance of approval from banking institution. But, sometimes your credit report can be essential when you are looking for a new job or applying for insurance.

You may request your credit information from the Credit Bureau. The request can only be made by the individual. In the case of business entity or deceased individual, the request can only be made by the person authorised by the entity (for business) or by the court (deceased).

For individual, the report can be obtained via eCCRIS, an online platform for users to access their CCRIS score at their convenience eccris website by visiting CCRIS kiosk in Bank Negara Malaysia offices and Credit Counselling and Debt Management Agency (AKPK)

Check for any incorrect information about your credit accounts, information that could be a warning that someone is misusing your account i.e credit card usage. You should also check your scoring purposes, your on-time payment history and the amounts you owe, or your credit utilization. Your credit score also looks at how long your line credit has been open and how much new credit you’ve been seeking and the different types of credit you use.

To build a good credit score will require immense discipline and with current situation now, majority of us are badly affected by the economic impact of the pandemic. I believe that you will make use of the loan moratorium and if needed, another additional targeted moratorium offered by banking institutions.

4. Keep track of each goals: priorities, needs, or wants

It can help if you prioritize your financial goals, so when it is needed, you know which one need to be done first. Label each goal on your worksheet, in three categories, critical, need or want. Let’s say you have a short-term goal to build up your emergency fund, and it falls under ‘critical’ category. You will work first toward allocating your income and managing your cash flow to ensure you have enough for other priorities after saving for the emergency fund

But if you have another short-term financial goal which is to change your current car, which is still running just fine – that’s a ‘want’ and you can act on it once your cashflow is stabilized.

5. Engage with a licensed financial planner

As we move into 2021, you must have several financial goals in your mind, but you are clueless as how to get started. Other than reading about personal finances tips in the internet which may be inaccurate (or even cringeworthy bad advice!), why don’t you consider engaging with a professional expert?

A licensed financial planner can help you to take a look at your current financial state and devise better strategies to eliminate financial risk and building your wealth in the long run. This strategy is a game plan that puts you on track to achieve your financial goals.

Conclusion

So, now that you list your personal financial resolution for the year 2021, let’s start by dividing it into 3 categories of critical, need and want. The process of achieving them can be tedious but with proper preparation and valid information as well as help from your financial planner, you are off to a great start next year!

Have you set your financial goals for 2021?

What is your strategy to achieve your 2021 financial resolution?