What Are The Alternatives?

An alternative investment is one that is outside the three traditional investment classes: stocks, bonds and cash. These traditional classes are what most people think of when they think about investing. But how have they performed over the long term?

A recent (2010) report by Elroy Dimson, Paul Marsh and Mike Staunton from the London Business School showed that if you’d invested £1000 in 1955, the FTSE All-Share index would have turned it into £0.5m by now. That works out as a return of 12% per annum.

Interestingly, if you’d bought a house in 1955 and kept it until 2010 it would have made virtually the same average return of 12% per annum. (This is based on an average capital increase of 8.5% per annum and 3.5% per annum ‘in lieu of rent’ value.)

Remember we are talking about a 55 year average, but the return on stock and property way outstrips both cash and bond returns, neither of which has kept up with inflation. Happily, the 12% per annum return on stocks or property outpaces inflation over the period.

But what if you’re looking for something more? Alternative investments may be more risky, but they are attractive precisely because they hold the potential to create significantly more wealth.

One alternative to the FTSE is to invest in small companies. The Dimson, Marsh and Staunton report notes that £1,000 invested into small companies in 1955 would have produced an average annual return of 15.4%. That’s 3.4% more that the FTSE.

How much difference does that extra 3.4% make? Your £1,000 investment compounded at 12% for 55 years would grow to just over £500,000. The same investment earning 15.4% over the same period would give you a cool £2.6 million!

Most alternative investments are only available to high net worth individuals or institutional investors. The common exceptions are real estate and commodities.

In the last ten years vegetable oil, carbon credits, and alternative energy technologies have caught the public’s imagination. But for many in the UK, the most attractive alternative investment was real estate. With house prices rising every month it seemed daft not to jump on the housing train.

That train has run out of steam in the last four years. Capital values are static or falling and property buyers have become a rare and endangered species!

However, the number of humans in the UK is neither static nor falling. We all need housing. The pundits tell us that Britain has changed its view of property: we are becoming a nation of renters rather than owners. If that is true, investing in rental property might now be a smart move.

You can buy a share in rental property for as little as £2100. Giroma’s FFPLite programme gives you a share of capital gain (historically 8.5% per annum) and a fixed return of 7% per annum paid to you monthly. Co-incidently, that combined return of 15.5% is virtually the same as you would have made by investing in small companies on the AIM - turning £1,000 into £2.6 million over 55 years. To find out more about FFPLite, click here: www.giroma.co.uk/ffplite.