Stock market alternatives – how the wealthy invest

With stocks and shares having such a high rate of failure, it’s no wonder many investors are reluctant to invest their money in the stock market.

But what are the alternatives that truly wealthy and successful investors turn to? We’ve identified some great possibilities for those looking to diversify their portfolios away from stocks and shares. Explore how property, peer-to-peer lending,  and of course, physical gold could help protect your wealth in uncertain times.

Investing in Property

For most people, their primary property investment is the family home. But building a property portfolio and generating long term returns is an often-used strategy for wealthy investors. The right property will return a reasonable yield, grow in value as the asset appreciates, and be protected from short-term stock market fluctuations.

But unless you have a large amount of cash around, real estate investments usually aren’t owned outright, which comes with inherent financing risk. Of course, we all hope there isn’t another financial crisis on the horizon, but property investors need to be prepared for the long term. Not only is it a lengthy process to sell up, but there are also substantial costs involved which need to be factored into any return on investment.

The UK’s recent stamp duty holiday was a boon for buyers and certainly did the job of buoying up the market, but the holiday is over, and these costs are back. In addition, the property has to be managed, and any maintenance and repair costs are shouldered by the owner, which will affect the yield.

Investing in holiday Lets

The pandemic and Brexit have conspired to cause a surge in staycations. As a result, holiday lets in the UK are enjoying a period of exceptionally high demand. Investors can choose to buy a holiday let if they are looking for property investment and want the tax benefits that aren’t available for buy-to-let properties. Holiday lets are classed as a business and are taxed as such, so there are various tax deductions that can be made to lower the tax burden. But it’s also important to note that it’s classed as a business because it is one. Lets are restricted to short periods, which means a much higher level of management is required. There is also a much higher risk of fallow periods where no income is generated (although high-season can be very lucrative).

It’s also essential to do substantial research. For example, properties in holiday locations tend to be more expensive for their desirability. A lot of competition can lead to price fluctuations or even price wars that erode returns.

Investing in peer-to-peer lending

High Net Worth Individuals looking to diversify their portfolios and generate better returns turn to peer-to-peer lending as an alternative investment strategy.

The market for digitally-facilitated direct lending is only 15 years old but has grown quickly. As a result, it is now well-established as an investment opportunity. Investors can choose to select a borrower directly to lend to, or the platform can facilitate a more comprehensive selection of loans to invest in depending on your risk appetite.

The attraction for wealthy investors is selecting the level of risk they want to take on and potentially improve their returns outside of the volatile equity markets.

P2P lending isn’t default risk-free, but the platforms on which the lending is facilitated undertake credit checks of the individual or business looking for a loan. Thus, choosing a reputable lending platform and selecting the risk profile that matches your investment strategy. It also allows investors to make informed decisions and benefit from the P2P ecosystem built up around this type of investment.

Investing in gold

Gold is a staple of wealthy investor portfolios and is a crucial hedging strategy. Gold has a long history of weathering storms and remaining a safe haven as other parts of the economy come under stress. In addition, gold often has an inverse relationship with other investments, including stocks. So when these decline, the gold price often strengthens as investors turn to the precious metal as a safe haven. This means people with wealth to protect prudently diversify their portfolio for this reason, but they also choose to buy gold for its many other advantages.

Physical gold advantages

Physical gold is separated from the banking system, so it does not come with counterparty risk. In addition to the absence of counterparty risk, gold is also a tax-free way to invest. Gold does not attract VAT and depending on the format of the physical gold bought, it can be capital gains tax-free too. Certain gold coins, including Britannias and Sovereigns, are designated legal tender and cannot attract capital gains tax. Chancellor Rishi Sunak has started a review of capital gains tax, and it may be in line for an increase as the government begins the arduous journey of balancing the books after its pandemic spending spree.

Gold is a private, tax-efficient, safe-haven investment used widely by wealthy investors with diversified portfolios. We could all take a leaf out of their book.