People are attracted to so-called alternative assets for various different reasons.

For some, tangible and desirable objects like stamps, paintings, and classic sports cars appeal in a way that shares in a company or government bonds can hardly match.1

Others are scared by the wild swings in share prices, and even in supposedly safe haven assets like gold.

Like those who argue that UK property will always be a good investment over the long-term, they believe a painting by a respected artist or a case of great French wine will hold its value whatever happens to shares.

But are they right?

Well, sort of.

Historical alternative asset class returns

Data on the historical returns from alternative assets is sketchy. Long-term returns tend to be whipped out by those with an alternative asset class to flog, although now and then you’ll find figures cited in academic research.

As I’ll get to below, investing in alternative asset classes also has more hidden costs than a Faustian pact with the tooth fairy.

However we have to start somewhere, and the Knight Frank Luxury Investment Index (KFLII) is as good a place as any.

The upmarket London estate agent tracks the sort of sexy alternative assets that appeal to the global elite that makes up its wealthy clientele. So no alternative investments in 1940s comics or Cabbage Patch Dolls here – it’s all fancy cars, classic watches, great wines, and the odd Ming vase.

Here are the one, five, and ten-year returns on the alternative assets it follows:

	1-year (%)	5-year (%)	10-year (%)
Antique furniture	-3	-15	-19
Watches	4	33	83
Chinese ceramics	3	43	83
Jewellery	2	51	146
Wine	3	3	182
Art	-6	12	183
Coins	9	83	225
Stamps	7	60	255
Classic cars	28	115	430
			—
KFLII	7	40	174
Gold	-23	68	273
Prime London property	7	27	135
FTSE 100	12	11	55

Source: Knight Frank

A few sources are acknowledged for this data:

• Prime London property is the return delivered by Knight Frank’s Prime Central London residential index.

• Other sources of data include the Historical Auto Car Group, Stanley Gibbons, and Art Market Research.

• The data for coins and jewellery is provisional from Q4 2012.

Getting back to the returns reported, on the face of it they look absolutely amazing.

Who wouldn’t want to have a luxury car parked in their garage and see its value go up over 400% for good measure?

Who indeed – but before you rush out to buy a Beamer, let’s quickly consider some of the snags.

Luxury assets are a luxury

Firstly, by its nature, this index follows the best stuff. It’s a luxury index, not an index of old tat offloaded at a car boot sale.

And sure, it’s easy to find examples of paintings by Picasso or pieces of furniture by 1930s modernists that have easily beaten inflation as well as every major asset class over many decades.

However these are the stars of the alternative asset world. Getting overly excited about them is a bit like judging the returns from shares solely from the returns made by those who bought into Coca-Cola in the 1950s. Many an antique banger or commemorative stamp has delivered much more mundane returns.

Survivorship bias also looms large. Andy Warhol’s early paintings now command millions, but what about his forgotten fellow pop artists? You can buy prints by some noted British rivals for a few thousand pounds. The divergence between the famous and the also-rans can easily be a hundredfold or more.

Then there’s the terrible liquidity of most alternative assets. You can sell a fund containing thousands of shares in 15 seconds. Try doing that with a Fabergé egg.

But suppose you do bag an Old Master. Where are you going to keep it? Who is going to look after it? How much will it cost to insure?

Knight Frank acknowledges this in the small print:

The index does not take into account any dealing, storage or management costs.

If cars, paintings, and bottles of Château Lafite could be bought cheaply on eBay and kept in the spare room, these returns would be more meaningful. But they can’t.

The historical returns from the FTSE 100 are also given without dealing and management costs, but for a cheap index tracker they’re a pittance by comparison.

Rich pickings

I’d also note the past decade has likely been a golden one for alternative assets.

We saw two big stock market crashes, which drove people to look for alternatives. Interest rates fell remorselessly, which reduced the effective cost of carrying income-less assets like gold. The financial crisis that made people lose their faith in all non-tangible assets was the icing on the cake.

There is however one tailwind that I think is likely to continue to blow positively for alternative assets (besides the hype factor), and that’s globalisation and the rise of the super-rich.

What good is it being a hedge fund manager, an oil sheik, or a Mexican telecoms baron if you can’t show off your wealth to the rest of the 0.1%?

Scarcity value will likely propel valuations for the very best paintings, properties, and collectibles for this reason, though I’m sure progress will be choppy.

Very rich people also tend to have the sort of private banking facilities and similar that reduces the incremental cost of storing just another classic watch.

Little alternative for the little guy

All these problems mean that most of us should probably avoid focusing on alternative assets, except when we want to own them for their own sake.

I was always told by rich people to buy antique furniture, for example, but its weak performance over the past ten years shows how fashions can change. However the price slide wouldn’t stop me buying a truly lovely Art Deco wardrobe that I liked. If it held its value, all the better.

Gold can be bought and stored fairly cheaply with the likes of Bullion Vault or via an ETF, but most of the other assets are hard to invest in with confidence.

Fine wine funds, for example, have had a lot of bad press after more than 50 reportedly went bust in just five years!

As a more active investor, if I was very optimistic about alternative asset classes I’d probably look into listed companies like Stanley Gibbons (stamps) and Noble Investments (coins). But these are small cap shares that come with their own lengthy risk list, and most people should steer well clear.

In fact, I can’t help feeling that interest in alternative assets is a sign that most people need to understand the traditional asset classes better. And be more wary of financial services geeks bearing antique gifts…

1. I know, who’d prefer to own an Aston Martin over an exciting stocks and shares ISA? Tsk! Some people. [↩]

The lure of making a killing and escaping the rat race runs deep. It doesn’t matter what gender, postcode, or social class – people of all sorts want a quick fix to their problems.

But fast fortunes don’t tend to come to those who seek them – or at least not the way they’re advertised.

The success of the National Lottery, for instance, is not founded on the great returns on investment you get from lottery tickets.

It could be you, sure. But then it could also be you who discovers you’re fatally allergic to bee stings or that you attract lighting like a church spire.

Vastly more likely, you’ll get two numbers right and be “so close” on a third.

All your life.

What about traditional gambling? Everyone knows the odds suck, and pretty much nobody knows a long-term winner. People don’t walk past betting shops saying to themselves: “Ah, there’s a bunch of fine fellows making their way in the world”. Yet people still gamble.

The list goes on. Day trading and spread betting, daydreaming of being a glamour model or a professional footballer, metal detecting, bank robbing – young or old, man or woman, Northern grump or Southern ponce, somewhere out there is a dubious money making scheme with your name on it.

If you think there isn’t, you probably just haven’t come across it yet.

Aim high, hit low

Indeed, investing can be a sucker’s game, if you let it.

Much of the poor reputation of the financial services industry is well-earned, but we should carry some of the blame for ourselves.

People expect too much – returns without risk – and they expect it too soon. Bad things happen when you confuse getting financially secure with getting rich quick.

• A sensible approach is to read up on passive investing, know the long-term real return from a balanced portfolio is likely to be between 3-6%, plan your future, and then execute for 30 years.

• A bad approach is to read on a bulletin board about an ex-SAS commando who has got the ear of an African dictator and the keys to a shoe-in of a gold mine, and then remortgage your house and pile in.

Few of us are that bonkers. But most people can be seduced by the idea of superior returns from star fund managers, or from tips in newspapers.

Or else we see that our shares have gone up 30% and our bonds have fallen by 5%, and we think “great, I’ll have some more of that”, shift the whole lot to equities, and then sell out in a panic when the stock market crashes because we’ve no longer got a safety buffer.

I don’t think there’s anything wrong with having 5-10% of your money in a speculative ‘fun’ portfolio if it keeps you from tinkering with your main strategy.

Heck, I don’t think there’s anything wrong with purely active investing in individual shares if you’re realistic about why you’re doing it and what you are likely to achieve.

But trying to make lottery winnings money on a school dinners budget – by gambling with your hard-earned savings and putting your pension at risk in the pursuit of an extra 5% here and 5% there – that’s a recipe for missing your target, and so for excessive beans on toast in your old age.

Fact is, diversified balanced portfolios are not going to turn you into Richard Branson or Steve Jobs. They’re not meant to.

Passive investing is straightforward, easy, and I recommend it.

But if you want to be the next Richard Branson or Steve Jobs, you’re going to have to do something hard, not something easy.

Easy and hard ways to get rich

I know there are a few crooks, flukes, and bankers who have made fortunate or ill-gotten gains from long odds.

But if you look at the vast majority of people who started with nothing and achieve great or early wealth in life – as opposed to modest and meaningful financial freedom – they usually did something difficult, rather than chase easy money.

Here are a few examples.

Investing

“Easy” money: Day trading, blindly following tips from strangers on bulletin boards, reading about Kondratiev waves and market timing, insider dealing.

Hard but achievable money: Saving vastly more than you spend from an early age into a diversified portfolio, spending your days looking for illiquid micro-cap value investments, setting up your own hedge fund and profiting from other people’s money. (Hey, it worked for Warren Buffett!)

Property

Easy money: Flipping off-plan properties at the top of a bubble, buying into hot property funds at the top of a bubble, using your credit card to secure a buy-to-let that you claim is your own home.

Hard money: Hunting down genuine development opportunities, renovating rundown houses using “sweat equity”, building a solid portfolio of investment property over 5-15 years as a part- to full-time job.

Business

Easy money: Knock up an affiliate website touting cheap life insurance products, spam marketing, anything advertised that claims you’ll make 40-100% a year with no effort.

Hard money: Buying into a proven franchise with a six-figure initial fee, launching a start-up business that serves a genuine need, becoming a contractor or a consultant in your own industry after years of experience and networking.

Creative

Easy money: Ripping off 50 Shades of Grey with a Kindle novel about a female banker who likes to step on her underlings in high heels, being an angel investor in a theatre production, blogging about investing.

Hard money: Devote 10-20 years to honing your creative passion to the point where you don’t care whether you get paid you love it so much, and then finding a niche audience that is happy to pay you for your talent.

Career

Easy money: Boiler room tout, porn star, drug dealer, as well as deluded ambitions for most of us like celebrity photographer, music producer, or sports star.

Hard money: Corporate lawyer, veterinarian, accountant, amazing plumber, own the boiler room.

If getting rich through investing, punting, or peddling tat was easy, we’d all be in the 99% and the 1% would have Primark to themselves.

The money shot

There will be exceptions. Some porn stars make millions, but most are literally one-shot wonders. There will always be a few people who put their net worth into a single growth stock and make a fortune. And I’m sure we haven’t seen the last multi-million selling DIY Kindle novel.

But the odds in all these areas are immense.

A clue is in how easy it is to get going – how simple it is to place your bet.

It’s very easy to buy a share. It’s very easy to start a blog. It’s very easy to take all your clothes off for a man who promises to introduce you to Hugh Hefner.

But none of those things are very likely to make you rich.

In contrast, hard things are usually rewarded – if you put the hard work in, or do the hard mental work, or both.

If you cannily buy a rundown property in a great part of town and show up every weekend to renovate it, you might make 20-30% profit. If you do that 10 times, working your way up the chain as you go, you could make a real difference to your life. At the cost of far fewer free weekends!

Is it worth it? Maybe, or maybe not – money isn’t everything, and they’re not selling extra time.

It’s for you to decide how much you care about being wealthy.

Just don’t expect your sensible savings plan to make you rich quick – because such an attitude is only likely to make you poorer.

Good reads from around the Web.

Post of the week goes to the annoyingly talented David Cain, and his interview with The Man – the faceless figure of big society who gets blamed for all our woes.

Writing on his website Raptitude, Cain asks The Man why he doesn’t care about his employees:

Cain: You don’t take any responsibility for the condition of your employee’s lives? Work is a huge part of life.

The Man: You’re touching a nerve here. Listen, I run a solid business, and I don’t think I’m going to run out of employees or customers any time soon, so I’ll spare you the company-spokesman runaround — no, I don’t take responsibility for the state of their lives and I don’t see why I should. Particularly when they don’t take much responsibility for their lives themselves.

Do you know how people with hoards of money get to have those hoards of money? They make some money, and then they don’t spend it all. They keep some each time it comes in, and they use it to make more come in next time. That’s how power is accumulated.

Instead of accumulating power, most of my employees accumulate objects in their homes, or they just burn the money as it comes in, on booze and expensive sandwiches. What I see is people setting up their lives such that they become dependent on powerful people like me, which is exactly the opposite of how one ought to build wealth.

That’s why I’m The Man and they work for The Man.

They’re free to do this. I pay a fair wage, in thousands of different areas of work, each of which they can take or leave. I find they don’t pick very good ones for themselves, but they just stay with it rather than starting over somewhere else.

Then they get grumpy, and instead of finding a more personally appropriate way to earn a living, they stay on the payroll and go through the motions and try to “stick it to me” by stealing pens and playing rock music.

I’ve broken half-free of The Man’s grasp in a couple of ways – I am self-employed, and I’m accumulating a ‘F.U. The Man’ fund – but in other ways I’m not even as pseudo Bohemian as I was in my early 20s.

The Man has me living in London, wondering when I’ll ever buy a house and fearful of decamping to somewhere cheap and underpopulated to write novels and learn to play the trumpet.

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