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Insight & Opinion

Hobby investing – why it’s becoming a popular way to invest money

Author: Luke





Believe it or not, you can make a lot of money from a hobby. It’s all about knowing how to transform that hobby into an investment. Coutts, which is a global wealth management bank that comprises the Coutts Index, is in charge of tracking prices of pleasure investments. It looks like the index has increased tremendously from 2005 to 2014. The returns have gone pass FTSE 100, featuring gains of 36pc.

The index focuses on targeted investment deals such leisure properties, residential homes, wine, fast cars and more. Needless to say, let’s not forget that we’re talking about investments. This means that there’s a level of risk involved every potential investor should be aware of. Hobby investments don’t provide regular income either; their intrinsic value is rather sentimental than financial. And yet hobby investing is a popular way to invest money.

Portfolio diversification

Before considering alterative investments, investors must assess their options as well as the risks involved. Diversifying an investment portfolio is more difficult than meets the eye, and people must understand that there’s a 50% chance of failure. They key to avoiding mistakes is to rethink your approach. Whenever we hear the word “alternative investment” we often think of a single asset class. But there’s more than one class. Alternatives offer access to all kinds of investment types and investment strategies meant to broaden our diversification opportunities, as well as widen our portfolio correlations.

Private equity

Private equity is a sensible type of investment strategy. It basically seeks to partake in the overall expansion of private enterprises through long-term investment deals. This form of “hobby investment” is an illiquid type of asset class. It has great potential for profit and capital appreciation, although it is available to top-tier investors with money to spare and experience in the business investing niche.

Hedge funds

Hedge funds use advanced investing strategies like derivative, leveraged, short and long positions in both international and national markets with the purpose of generating substantial returns and reducing volatility. This form of alternative investment is seen as a managed investment portfolio generally aimed at wealthy investors with experience in this domain.

Hedge funds are available in numerous sizes and shapes. Several types focus on arbitrage scenarios such as stock offerings or buyouts, while others are centered on specific situations. Even though many investors keep track of metrics like EPS (earnings per share), a lot of hedge funds are aimed at keeping an eye on an additional metric – cash flow.

Incorporating hobby investments into your current investment portfolio

When incorporating hobby investments into a current investment strategy, you should keep in minds the following considerations:

• Adopt a conservative attitude – understand that alternative investments make use of non-conventional approaches. Performance usually depends on managerial skill. That’s why you are advised to opt for strategies with a proven record; it is a sure way your investment stay stable.

• Suitable allocation – don’t spend too much on a “hobby investment” because you can’t predict the outcome. Allocate 10-20% max of a portfolio and try not to take unnecessary risks.

• Funding – alterative investments have completely different goals. Thereby they should be funded correctly. A fine wine investment for example, may feature a lot of risks. However, providing that you get informed in advanced, those risks can be significantly reduced. Reduce volatility by getting to know more information about this type of investment. Then you should consult with an experienced wine merchant to settle on a budget line.

• Proper structure – from a historical point of view, alternative investments were once available through private deals only. These deals had high-net worth requirements as well as limited liquidity. Nowadays, access to an alternative form of investment come with trade-offs. Settling on a suitable structure helps investors steer clear of risks and it will also keep them focused on incorporating more efficient strategies.

Investing private money in things you like and enjoy can bring you a profit. However, it’s different from investing in the traditional stocks and bonds, or real estate. Nobody can guarantee that you’ll make money from that collection of old watches. But it doesn’t hurt to try, particularly since there might be collectors willing to pay.

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