Despite what the name suggests, financial products defined as alternative investments include the likes of precious metals, art and managed funds. For today’s investors, especially those who are new to investing, this may seem confusing as these assets have been invested in for decades or even centuries.
Since the new millennium, technology’s impact on the investment landscape has opened doors to new kinds of people and ways of making money. This inflow of new people, new financial products and new ways of investing has made it harder than ever to define key terms like trading versus investing, and traditional versus alternative investments. This is because definitions depend on the individual investor, their goals and what they prioritise when investing (or trading).
In this article I’ll provide a snapshot of the current landscape, showing the key differences between trading and investing before diving deeper into the muddy waters of traditional versus alternative investments. I’ll conclude by looking ahead to what investing’s future could be if the trajectory of current trends continues.
The differences between trading and investing
Google (NASDAQ:GOOGL) the differences between trading and investing and while it’ll be clear that these are very different things, you may quickly develop a headache—there’s no standard definition for either.
I define investing as buying financial products to live off its proceeds. For example, buying to rent, an investment bond, or buying shares for the dividends. Trading however is attempting to profit from the capital appreciation of an asset, like buying a stock and selling when its value rises or buying a property and selling it for capital appreciation.
While assets (like properties or shares) can be traded or invested in, the two activities are mutually exclusive and tend not to cross over because they support different wealth goals.
Traditional versus alternative investments
That’s not to say investing can’t be high reward or require significant time investment. This completely depends on the investor, their strategy, and how much time they’re able to put into finding high-yield investments. Being a traditional or alternative investor isn’t likely to affect returns either, largely because these terms don’t mean much in contemporary investing.
Those who are in the investment landscape by and large agree that traditional investments include publicly traded assets (cash and bonds) that are meant to drive return over the long term. Alternative investments are a bucket term for everything else. This includes art, convertible bonds, diamonds, ostrich farms, timber plantations and cryptocurrencies. It also refers to ‘non-traditional’ ways of investing that by today’s standards are very normal, like ETFs, mutual funds and private equity funds.
You may have noticed an elephant in the room: real estate is the muddiest asset of them all. The CFA, for example, claims that real estate is an alternative asset, but does acknowledge that it’s one ‘...of the oldest types of investments’. In Australia, where investing in property is arguably a national pastime, it’s hard to argue it isn’t traditional.
The future
Every macro socio-political-economic trend, and many micro trends, affect the investment landscape in some way. The two I’ll mention in the context of this article are the ongoing evolution of technology and population growth.
Technology has democratised investing (and trading) meaning it’s more accessible to anyone willing to learn how the markets work. Parallel to this, the popularity of ETFs and other fund vehicles means many people are able to put their money into the hands of people who can invest or trade for them. These investors have significantly less control over their investment, but this does mean there’s more capital than ever in the market.
Population growth also means more investors, but it could also spell the end of Australia’s favourite traditional alternative investment, residential property. As major capital cities get more built up and price out investors, we may see growth in different ways of investing in real estate like collegiate investments or within a fund offering.
The takeout of all of this is that spending time worrying about clear definitions isn’t productive in a landscape going through constant change. Smart traders and investors should rather take the time to keep their finger on the pulse of where they’re putting their money, based on their specific goals.
Disclaimer: This article is not intended as investment advice.
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