Why Alternative Investments
The “ostrich approach” is not a viable option for anyone, especially now. With underperforming pension funds, fluctuating currencies, falling house prices and the near extinction of the buy to let mortgage product, you might think that the best place for your money is in your savings account, accruing interest. However, low interest rates mean, that you are actually losing money each year against the rate of inflation.
Now is the time to take control and turn to alternative investment products to protect yourself and your family’s financial future.
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* Alok receives a lesson from our plantation partner.
Pension Problems
We are finally waking up to the fact that the pensions that we have been investing in for so many years are in no way going to be able to support us in the lifestyles we’ve grown accustomed to.
What’s more, the current pension structure almost always guarantees that you’ll pay tax in retirement, if there’s any worthwhile fund built up. Additionally it guarantees that you will be unable to pass your assets down the generations once the annuity has been purchased.
“Incomes from personal pensions have fallen by more than 70% in a decade and that is before inflation is taken into account!” (Moneyfacts 2010)
For Example: according to the Moneyfacts research, someone who saved £100 a month into a pension over the past 20 years (i.e. £24,000 invested) has built up a pension pot of £40,800, which would have actually been worth £104,000 if they had retired 10 years ago.
Conversely, if you were to invest £15,000 into forestry today, in 20 years time the value of that investment alone, assuming returns were paid at year 10, 15 and 20, based on our investment model, would deliver astronomical net returns in the region of:
- £21,200 in year 10 (120 trees harvested at a value of circa £208 per tree)
- £75,500 in year 15 (140 trees harvested at a value of circa £635 per tree)
- £140,000 in year 20 (140 trees harvested at a value of circa £1,172 per tree)
This is a total projected net return of circa £237,000 clearly outperforming traditional pensions and investment classes. The long and short of it is, that trees will continue to increase in value as they grow more mature and will do so despite the peaks and troughs of other economic forces.
Providing for our children
The average cost of raising a child to the age of 21 has crashed through the £200,000 barrier for the first time according to research published by Liverpool & Victoria, the UK’s second largest friendly society (The Guardian, Feb 2010). Family finances are being squeezed from all angles, not least by our schools. According to the Independent Schools Council, fees rose by an average of 6.2% last year to £11,250 – more than double the rate of inflation.
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Today the average student leaves university with an eye-watering £25,000 debt, and this is in addition to the financial support of parents who eagerly want to assist in paying for items covering anything from rent and bills through to clothing and travel. But it doesn’t stop there; there’s the first car, the first house, funds to start their own business, weddings – all of which cost serious money. We all want to be able to provide for our kids, but the reality is that many of us are poorly prepared, and with the recent collapse of so many traditional investment classes, many of us have become derailed from the track we hoped would lead us to that financial position.
It’s imperative that we stay focused, keep our goals in sight and not be put off by recent events. Diversification and exploring new avenues is key and with forestry and agricultural commodities outperforming equities and bonds by more than 200% in some instances, this is a clear solution.
Turmoil in Traditional Asset Classes
At the height of the tech boom in 1999, investors were encouraged to invest in to the stock market. Since then shares have fallen by an average of 1.2% a year in real terms – the worst performance since the 1970’s.
The government bonds that we as investors were then steered towards have fared little better. Returns for the next decade are forecast to be as low as 1.6%, with zero return predicted over the next five years according to Barclays.
To put things into perspective, JP Morgan recently (Feb 2010) compared today’s economic position with that of 1976, when Britain had to be bailed out by the International Monetary Fund (IMF).
Not surprisingly this has left people extremely confused about where they should invest their money. Especially since property is currently as popular as root canal surgery.
UK Housing Market Crash and Depression
The facts are that house prices fell by 20% from Autumn 2007 to Spring 2009 but have risen by about 10% since last spring due to the government injecting £300bn of tax payers money into the mortgage market via the Special Liquidity Scheme and Credit Guarantee Scheme.
This £300bn is just about all spent by the Banks (ie as loans for mortgages) and the Bank of England has said it will not renew the SLS & CGS Schemes and that Banks need to repay the £300bn by 2012 & 2014 respectively. Once the tap has been turned off, it is very likely that UK house prices will again restart their crash/falls towards their long-term trend levels. The UK could even follow the serious troughs seen in many other countries around the world such as USA, Spain and Ireland.
In January 2010, estate agents Savills went on record in The Sunday Times predicting another fall of 6.6%, while Capital Economics forecast an even sharper 10% decline in the same newspaper.
So what does this mean for us as property investors and more worryingly, as homeowners? Manyof us are now in a position of negative equity and for those of us who are fortunate enough to still have equity the problem is, how to release it when the mortgage products that were so readily available are now near to extinction and very difficult to obtain. Even if you are in a position to refinance your property and release equity, where would that leave you in the future if you reach the age of retirement and still have large monthly mortgage payments and a large mortgage to clear?
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We’re notsuggesting that property is not a viable option; over a long period of time investing in property has proven to be fairly rewarding for many of us with existing portfolios, especially in the current climate while the interest rates are so low. However, it’s important to consider what would happen to that investment if interest rates went the other way, leaving you not only in a potential position of negative equity, but also running a portfolio that could potentially go from making a tidy monthly profit to a devastating monthly loss. Diversification is key and Forestry and Mixed Crops can offer stability to an already volatile investment portfolio. Teak, for example, generates an internal rate of return to the tune of 20-30% per annum.
The Strength of the Commodities Market
The reason that many modern investors are choosing to put their money in to timber and agricultural commodities is because they have little to no relationship with the economic chaos of recent years. Quite the opposite in fact: it can be clearly seen that when the stock market is down and bonds are not performing, investors seek safety in commodities, which drives values up. For the rest of the time, when the world is acting normally, the value of commodities, with unique supply and demand characteristics such as tropical hardwood, continue to rise.
The strength of timber hasn’t escaped the attention of the financial press:
“Average annual returns on timber . . . have outstripped those from leading global stock indices, property, oil and gold for the past decade.”
The Economist, February 5, 2007
“The UN Food and Agriculture Organisation predict world consumption of industrial wood will rise 60% over the next 25 years.”
“New figures show the Investment Property Databank UK forestry index returned 32 per cent in 2007, five times higher than equities and bonds and in sharp contrast to the fall in commercial property.
The Financial Times, July 4, 2008
