Esoteric Investing: ‘If it seems too good to be true, it probably is’

Phil Smithyes, Head of Financial Planning
In a climate of historically low interest rates and low inflation, investors can either seek the next great opportunity or set themselves a more realistic expectation of what a ‘good return’ looks like.

Increasingly we are working with clients to help them to achieve a ‘sensible return’, explaining the direct correlation between risk and reward and the importance of understanding their own attitude risk and their capacity to absorb losses.

You won’t be surprised to hear that as financial advisers we see a wide ranging mix of ‘investment opportunities’ come across our desks, many of which offer 1980’s style returns with, apparently, little risk and minimal chance of anything going wrong. Virtually all of these can be dismissed immediately, although some stimulate more interest than others.

Possibly one of the most memorable for me was a low risk investment into Kenyan cotton farms which offered a ‘guaranteed’ return of 15% per year. Suffice to say, I didn’t read beyond the headlines and this one was quickly confined to the cylindrical filing cabinet.

Alternative opportunities have arisen more recently, some of them reflecting the technologically advanced world we live in, such as crypto currencies or buying fictitious shares in footballers on online betting exchanges run through a mobile phone app. Others lean towards more traditionally accepted assets which appeal to a certain target audience. ‘Investment Opportunities’ for buying wine and whiskey have been particularly prevalent in 2019.

I can’t profess to fully understanding either the appeal or mechanics of investing into crypto currencies, spearheaded by the Bitcoin revolution but now reaching out to a variety of synthetic markets and ‘virtual’ investment instruments. Whilst stories abound of investors making vast returns overnight and becoming instant millionaires/billionaires, less publicity is given to the thousands of investors who have caught a cold by ‘following the herd’ and investing at the wrong time in something they don’t understand and where they have little or no idea on where their money ends up.

In picking up one of the more ‘high end’ freebee magazines in the summer from my local train station, I read with great interest an article on investing in Irish whiskey. According to the article (which turned out to be an advert) this asset offers returns of 12%+ per year with a mix of ‘huge stability and huge growth upside’ with little ‘downside risk’ and quoted returns as high as 54.5% a year. Whilst some (or possibly all) of this may be true, I can think of a number of risks that could result in a disastrous outcome for investors, not least a lack of a secondary market and, therefore (somewhat ironically) a lack of liquidity. With casks starting from ‘as little as 2,900 Euros’ this is not for the faint hearted and certainly only for those who have an extensive knowledge of the sector and market.

Of course, investing in fine wine has had a longer and wider appeal as the fall-back position is to retrieve the bottles from storage or bond and to drink the asset. Most sensible investors will buy two cases of their chosen vintage, one for drinking and one for investment. Successful investing in wine basically boils down to two strategic disciplines: scarcity and volume. You either buy because you believe that a wine will be hard to find in the future (in which case there’s a probability of price appreciation where demand is in place) or you buy today because you believe it’s going to be better value now than in a few years’ time – taking account of the recommended drinking windows.

Since the 2008 global crisis, recent figures show the Wine Owners 150 index has risen 145% compared with the Dow Jones at 106% with the most successful market being the Wine Owners Champagne 60 which has risen 331% over the same period, outstripping the Wine Owners Bordeaux First Growth 75 which rose by 103%.

Whilst fortune may well favour the brave, understanding where your monies are invested and the risks involved in making these investments prior to parting with your hard earned money are of paramount importance, especially as very few (if any) of these investment offer regulatory protection and many are illiquid. The one key message we would send to our clients when making any investment is to adhere to the golden rule of ‘if it sounds too good to be true, it probably is’ and whilst you may just miss out on the next great opportunity, you are also far less likely to regret losing all of your money.

Crowe Financial Planning UK Ltd does not advise on or recommend investments in assets that are not regulated by the Financial Conduct Authority. Wine, along with other alternative investments such as crypto currencies, carbon credits, coloured diamonds, graphene, rare metals, art, land etc. is not regulated by the Financial Conduct Authority.

If you are not sure which investments are right for you, you should seek advice. Remember that investments can go up and down in value so you could get back less than you put in.


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Phil Smithyes
Phil Smithyes
Partner, Head of Financial Planning
Thames Valley