Alternative investments – is now the time to jump ship?

With equity markets failing to inspire, it would be understandable if many parents started to look for alternatives. But while asset diversity can be a good idea for many, the costs and higher risks associated with other forms of investment can make it unattractive.

The most obvious ‘bolt-holes’ from shares for parents planning school fees are probably deposits and government bonds and over the short term, this can prove effective. However, analysis of the longer term shows that even over as little as two years, equities have outperformed both classes in more than two thirds of periods. Looking at ten years, the figures are even starker with shares winning nine times out of ten.

This does not mean you should never move from shares into cash of bonds, simply that if you do, you need to get your timing right and be aware of the costs involved in selling, and then later re-buying, shares.

Selling shares, or unit trusts / investment trusts and insurance bonds that are based on shares will usually involve some form of costs, as will re-buying them later. But other forms of asset can have costs that may not at first be obvious. For example, if you buy gold VAT might apply, adding 17.5% to the cost; so you need to have considerable growth just to cover this, before you can make a profit. What is more, assets such as gold have to be stored – and insured against theft and other risks, further adding to the costs associated with them.

You can, of course, purchase shares in companies or funds holding gold, but you are then not holding the asset directly and transactions may actually take place at a discount, or premium to the actual value of the underlying asset. This could well mean that your investment does not perform in the same way as gold.

Further to reinforce the message, figures showing comparative annualised investment returns (that is the total growth for the period expressed as an annual growth figure) for different assets, it is easy to see that, over 15 years, shares and commercial property have outperformed index-linked government bonds, gold and certainly cash deposits.

Any investment decision should be based on a number of factors, including:

• How much risk of short-term volatility you are prepared to accept;
• How much risk of relative underperformance you are prepared to accept over the longer term;
• Whether you can afford to loose part or all of your money, or require some level of guarantees; and
• How long you wish to invest for and how important it is to you to have access to your cash in the short term.

Some newer forms of investment offer some degree of guarantees, even though they are equity based. These all carry an element of risk that the guarantee will fail and the lower the degree of risk, the smaller the potential return. Nevertheless, these can still offer a good potential return.

One guide to watch out for is that following trends is seldom a good idea; it can result in the worst of all worlds – buying at the top and selling at the bottom!

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