Do not get carried away by alternative investment products
Expressive investments should be made from savings after setting aside capital for your life goals
If watches are meant for only time management, then why do some individuals own a Patek Philippe? Similarly, if cars are meant for only transportation, then why desire a Bugatti Chiron? Clearly, our desire to own products goes beyond the utility that these offer. In this article, we shall discuss whether individuals display a similar behaviour for certain investment products.
An individual’s desire to own exclusive products is referred to as conspicuous consumption. From a behavioural perspective, you could say that such products carry expressive features. An individual wearing a Patek Philippe watch makes an expressive statement to the world about his/her taste and social status, not to mention the pride of owning a classy watch. Individuals could exhibit such behaviour with investment products too. Investing in alternative investments such as hedge funds and private equity, for instance. The expressive feature comes from the fact that such investments are available only for individuals who can afford to invest a minimum of one crore per fund.
Other investments such as ESG (environment, social and governance) show that an individual cares about the ESG factors, which at present, is niche. Then, there are passion assets such as antiques, art, and other rare collectibles.
It is not that individuals who invest in the above-mentioned products do so only for the expressive features. These products could offer attractive returns, but they could be complex, and the risks difficult to understand. So, should you invest in such products for their expressive features, given the associated risks?
Investment products with expressive features should typically be part of your non-core investments. There are several reasons for this argument. One, your core investments are set up to achieve certain life goals such as buying a house and funding your child’s college education. It is moot if investments with expressive features such as ESG can generate consistent returns that serve your objectives. It is important to note that institutional investors, driven by social norms, have increasingly moved towards ESG investments.
You should consider buying such products if you want to integrate your strong ideologies into your investment decision.
Two, most investments with expressive features such as private equity and passion assets are not liquid. So, timing your exit from such investments to fund your life goals may be difficult.
And three, others such as cryptocurrencies and non-fungible tokens (NFTs) are risky and volatile. As discussed previously in this column, you could get rich investing in cryptos and NFTs, but the downside is high. It is, therefore, unlikely to fit within your core or goal-based portfolio. Typically, expressive investments should be made from savings after setting aside capital for your life goals.
The desire to invest in products that offer expressive features is not uncommon, given the emotional satisfaction that they provide. However, it is important to distinguish between expressive features of financial assets and physical (or real) assets. Why?
The expressive features of physical assets such as art and antique are what makes passion assets good investments. Such expressive features come from two aspects. One, the exclusivity because of owning a rare asset such as vintage art or a piece of Victorian furniture. And two, the accompanying narrative that makes the asset exclusive and rare — the exclusivity of, say, an author-signed first print of a 1940 classic, and the narrative that you beat others to the winning bid at an auction.
While hedge funds and private equity offer exclusivity, they may not provide a compelling narrative. Also, as financial products, they are abstract, not touch-and-feel assets. This is one reason mass affluent investors (those ineligible to invest in private equity) invest in passion assets despite low liquidity. Finally, you should buy such products only after routing your savings into investments earmarked to meet intermediate goals such as child’s education and down payment for a house.
(The author offers training programmes for individuals to manage their personal investments)
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