7 Blue-Chip Investment Alternatives
- Rupam Deb
- Jun 13, 2023
- 14 min read
Updated: Nov 26, 2024
While most investors have stocks, bonds and cash in their portfolio, certain asset classes can potentially offer better returns although these are typically not known. In this guide, we ranked and reviewed the best investment alternatives.
As an investor, it’s crucial to diversify your portfolio by exploring alternative investment options. While blue-chip stocks and bonds remain popular choices, there are other investment alternatives that offer unique advantages. Here are seven alternatives that you should consider:
NOTE: This article is not meant as financial advice or recommendations. We are only expressing our opinion for educational purposes only.
7 Blue-Chip Investment Alternatives
Options
Private Equity
Collectibles
Real Estate
Cryptocurrencies
Hedge Funds
“Under The Radar” (UTR) Businesses
Before We Begin: The MoneyWiseSmart Philosophy
While the traditional narratives divide assets into various classes, in MWS we focus on economic equivalents, where we consider the interest rate and the time value of money to calculate our true return on investment.
Our fundamental principle is that every investment is viewed as a business that generates cash flow over time. A business will incur expenses, and assuming it is run correctly, will generate more revenue than what the business consumes.
Across different income-generating asset classes like stocks, bonds and real estate, the core principle of finance mentioned above remains the same. However, most financial advisors don’t understand the core linkages and treat them as independent asset classes.
When seen from this perspective, both private and public equity can be viewed the same way because they are both businesses which can be analysed the same way. On the other hand, most cryptocurrencies and collectibles are driven by the Greater Fool Theory, where an “asset” is only bought due to a belief that someone will buy it for a higher price down the road.
Now that we’ve explained our core investing philosophy, let’s return to the commonly used definition of “investment alternatives” and explore different “assets” that investors buy.
Alternative #1: Options
Options are financial contracts that provide the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and time. Options can be used to generate income through selling contracts, hedge against potential losses, and provide access to a variety of assets.
History
Options trading can be traced back to ancient Greece, where philosopher Thales of Miletus is said to have used options contracts. In the 6th century BC, Thales predicted a bountiful olive harvest and secured the exclusive right to use the olive presses in advance. He purchased options contracts, granting him the option to exercise the right to use the presses at a later date. When the harvest season arrived, Thales exercised the options and earned significant profits.
However, the modern concept of standardised options emerged in the early 20th century with the establishment of organised exchanges. The Chicago Board Options Exchange (CBOE), founded in 1973, played a crucial role in popularising options trading. Options gained traction as financial instruments that allow investors to hedge risk, speculate on price movements, and generate potential returns.
Advantages
Potential Income: Options can be used to generate cash flow through selling premiums
Wealth Protection: Options help investors to hedge against potential losses or even recover their losses from positions currently in the red.
Consistent Performance: Options provide the opportunity to generate potential returns across all economic conditions, including bullish, bearish and consolidating (sideway) markets.
Disadvantages
Requires knowledge: When used wrongly, options can result in positions with unlimited risk and limited rewards. This puts investors at risk of losing their entire portfolio and getting a margin call from their broker.
Higher barriers to entry: Some brokerage firms do not allow investors to buy and sell options until they have cleared basic tests. This is actually a safeguard to ensure investors do not use tools beyond their current skill level.
More transaction fees: Several option positions require you to purchase multiple contracts, resulting in higher fees. For newer investors that do not know how to properly utilise such positions, they might incur unnecessary losses from transactions (on top of their investing losses).
Examples
Long Call: This position involves buying a call option, giving the holder the right but not the obligation to buy the underlying asset at a predetermined price (strike price) within a specified time frame. The buyer profits from an increase in the underlying asset’s price.
Short Put: In this position, an investor sells a put option, obligating them to buy the underlying asset at a specific price if the option is exercised. The seller earns premium income upfront and benefits from the underlying asset’s price staying above the strike price.
Covered Call: This strategy involves owning the underlying asset (e.g., stocks) and simultaneously selling a call option on that asset. The investor earns premium income from the call option but caps their potential upside if the asset’s price exceeds the strike price.
Analysis
Options trading offers both advantages and disadvantages. The flexibility of options allows for versatile strategies, cash flow generation and potentially unlimited returns. However, options come with certain complex risks like time decay and the risk of unlimited loss when used wrongly.
In our Options Series course, we discuss some of these cash flow generation strategies that we personally use for our portfolio.
Alternative #2: Collectibles
Collectibles are physical items that hold value due to their rarity, uniqueness, and historical significance. The value of collectibles is determined by supply and demand and can appreciate over time.
History
Collectibles have fascinated humans for centuries. From ancient coins and artwork to sports memorabilia and rare stamps, people have valued and preserved unique items for their historical, cultural, or sentimental significance. Over time, the demand for collectibles grew, leading to the development of markets and specialised auction houses.
The internet further facilitated the trading of collectibles, providing global access and liquidity. Today, passionate collectors and investors engage in buying and selling collectibles, which can offer not only personal enjoyment but also potential financial returns.
Advantages
Collectibles offer the opportunity for investors to invest in rare and unique items that can appreciate in value over time.
Collectibles are not tied to the stock market and can provide diversification in an investment portfolio.
Collectibles can be enjoyable and provide a hobby for the investor.
Disadvantages
Illiquid: Collectibles can be difficult to sell, especially during market downturns, which can make it difficult for investors to access their capital.
Subjective value: The value of collectibles is subjective and can fluctuate based on factors such as popularity, scarcity, and condition. This makes it difficult to predict the future value of a collectible.
High transaction costs: Collectibles can involve high transaction costs, such as auction fees, insurance, and shipping costs.
Examples
Art: Art collecting has been a popular investment for centuries. Examples of high-value artworks include pieces by Pablo Picasso, Vincent Van Gogh, and Leonardo da Vinci. The value of art is subjective and can be influenced by factors such as the artist’s reputation, rarity, and provenance.
Classic cars: Classic car collecting has become increasingly popular over the years, with some cars selling for millions of dollars. Examples of high-value classic cars include the Ferrari 250 GTO, the Bugatti Type 57SC Atlantic, and the Mercedes-Benz 300SL Gullwing.
Rare coins: Collecting rare coins can be a lucrative investment strategy, with some coins selling for millions of dollars. Examples of high-value coins include the 1933 Double Eagle gold coin, the 1804 Silver Dollar, and the 1913 Liberty Head nickel.
Analysis
Additionally, there is no guarantee that a collectible will increase in value, and even if it does, it may be difficult to find a buyer willing to pay the desired price. Despite these challenges, some investors may find collectibles to be an interesting addition to their portfolio, particularly if they have a passion for the asset class and are willing to take a long-term view.
Alternative #3: Private Equity
Private equity investments involve buying ownership in private companies. Private equity investors provide capital to these companies to help them grow and improve. They are typically long-term and provide diversification away from public markets.
History
The modern concept of private equity emerged in the mid-20th century when private investment firms began raising funds to acquire and restructure companies. The leveraged buyout wave of the 1980s further fueled the growth of private equity.
These firms took struggling businesses private, implemented operational improvements, and sold them at a profit. Private equity expanded globally, diversifying into venture capital, growth equity, and other specialised areas, playing a significant role in funding startups and driving economic growth.
Advantages
Higher potential: Private equity provides the opportunity to invest in promising private companies that might potentially become the next Google or Uber (and 100X the initial return on capital).
Greater control: Private equity investors can typically influence decision making inside the companies they invest in.
Enhanced Deal Structures: Private equity transactions often involve favourable deal structures, such as convertible debt, preferred equity, and other financial instruments that can offer attractive risk-adjusted returns.
Examples
Blackstone Group: One of the largest private equity firms globally, with investments in companies such as Hilton Hotels, Refinitiv, and Ancestry.com. They have a long-term investment horizon and focus on buyouts, growth equity, and real estate.
KKR & Co: A leading private equity firm that has investments in companies such as GoDaddy, Epic Games, and Academy Sports. They use a range of investment strategies, including leveraged buyouts, growth equity, and distressed debt.
Bain Capital: A Boston-based private equity firm with investments in companies such as The Weather Channel, Guitar Center, and Dunkin’ Brands. They have a focus on growth equity and leveraged buyouts.
Disadvantages
High Capital Requirements: Private equity investments typically require substantial minimum investment amounts, limiting access for smaller investors.
Uncertain Returns: The performance of private equity investments can vary significantly, with no guarantee of positive returns, and it can take several years to realize the investment’s potential.
Limited Marketability: Selling or exiting a private equity investment can be challenging, as there is no public market for these investments, and the process can be lengthy and complex.
Analysis
Investors should carefully evaluate the private equity firm’s investment strategy, track record, and fees before committing capital. Despite the high risks involved, private equity investments can offer investors significant returns, particularly if they are willing to take on high levels of risk.
Alternative #4: Real Estate
Real estate investments involve owning and managing properties such as commercial buildings, apartments, and single-family homes. Investors can generate returns through rental income, property appreciation, and flipping properties.
History
Real estate can be traced back to civilizations such as ancient Rome, who developed an advanced legal system that supported private property ownership and facilitated real estate transactions.
They constructed intricate systems of land registry, enabling the buying, selling, and leasing of properties. The Roman Empire’s extensive network of roads and infrastructure further facilitated the growth of real estate markets, with bustling cities and thriving marketplaces.
Fast forward to the modern day, and real estate plays a vital role in global economies. It encompasses residential properties, commercial buildings, industrial spaces, and more.
Advantages
Real estate investments can provide steady rental income and long-term capital appreciation.
Real estate investments offer diversification away from the stock market and inflation protection.
Real estate investments can provide tax benefits through depreciation and other deductions.
Disadvantages
High transaction costs: Real estate transactions can involve significant transaction costs, such as agent fees, closing costs, and property taxes.
Requires expertise: Real estate investing requires expertise in evaluating properties, negotiating deals, and managing properties, which can be a barrier to entry for some investors.
Market risk: Real estate values can be affected by macroeconomic factors such as interest rates, inflation, and unemployment, which can make it difficult to predict future returns.
Examples
Apartment buildings: Investing in apartment buildings can provide a stable income stream through rental income. Examples of high-value apartment buildings include the Park Lafayette Towers in Milwaukee and the Sky Building in New York City.
Commercial properties: Commercial properties, such as office buildings, can provide a stable income stream through long-term leases. Examples of high-value commercial properties include the Salesforce Tower in San Francisco and the Chrysler Building in New York City.
Residential properties: Residential properties, such as single-family homes or vacation properties, can provide a source of income through rental income or appreciation. Examples of high-value residential properties include the Playboy Mansion in Los Angeles and the Palm Beach estate of Donald Trump.
Analysis
However, real estate investing requires significant amounts of capital and expertise to be successful, and the value of real estate can be affected by macroeconomic factors such as interest rates and inflation.
Additionally, investing in real estate can be illiquid, making it difficult to sell a property quickly if necessary. Despite these challenges, real estate can be a valuable addition to an investment portfolio, particularly for investors with a long-term investment horizon.
Alternative #5: Cryptocurrencies
Cryptocurrencies are digital assets that use encryption techniques to secure transactions and control the creation of new units. Examples of cryptocurrencies include Bitcoin, Ethereum, and Litecoin. Cryptocurrencies are highly volatile and can experience rapid price swings.
History
The concept of cryptocurrencies emerged in 2009 with the creation of Bitcoin by an anonymous individual or group known as Satoshi Nakamoto. Bitcoin introduced the idea of decentralised digital currency, based on blockchain technology.
Its success paved the way for other cryptocurrencies, each with unique features and purposes. Cryptocurrencies gained popularity due to their potential for financial inclusivity, security, and borderless transactions.
Despite regulatory challenges and market volatility, cryptocurrencies continue to disrupt traditional financial systems, attracting investors, technologists, and enthusiasts alike.
Advantages
Cryptocurrencies are decentralised and not tied to traditional financial systems.
Cryptocurrencies offer the potential for high returns through price appreciation.
Cryptocurrencies provide diversification away from traditional assets and can act as a hedge against inflation.
Disadvantages
Volatility: Cryptocurrencies are highly volatile and can experience significant price swings in short periods. This can make it difficult for investors to predict future returns.
Lack of regulation: Cryptocurrencies are not regulated by governments, which can make them vulnerable to fraud and hacking.
Limited acceptance: Cryptocurrencies are not widely accepted as a means of payment, which can limit their utility and adoption.
Examples
Bitcoin: The first and most well-known cryptocurrency, with a market capitalization of over $1 trillion. Bitcoin’s value has fluctuated widely over the years, with significant price swings.
Ethereum: A decentralised blockchain platform that enables developers to build and deploy decentralised applications. Ethereum’s cryptocurrency, Ether, has a market capitalization of over $400 billion.
Dogecoin: A cryptocurrency based on a popular internet meme that has gained popularity recently. Dogecoin’s value has experienced significant price swings due to social media attention and endorsement from high-profile individuals such as Elon Musk.
Analysis
Only investors with a high tolerance for risk and significant capital should consider investing in cryptocurrencies. Despite the risks involved, some investors may find cryptocurrencies to be an interesting addition to their portfolio, particularly if they are looking for exposure to a unique asset class.
Alternative #6: Hedge Funds
Hedge funds are a type of investment that pools capital from high-net-worth individuals and institutional investors. Hedge funds use a variety of strategies to generate returns, such as long-short equity, event-driven, and macroeconomic strategies. These strategies can generate higher returns than traditional stocks, but they also come with higher risks.
History
Hedge funds trace their roots back to the 1940s when financier Alfred Winslow Jones pioneered the concept. Seeking to minimise risk, he established an investment strategy that combined long and short positions, effectively hedging against market movements.
His innovative approach gained attention and led to the creation of the first hedge fund. Over the years, hedge funds evolved, attracting skilled managers who employed various strategies to generate alpha.
Today, they serve as alternative investment vehicles, offering sophisticated strategies and catering to high-net-worth individuals and institutional investors.
Advantages
More flexibility: Hedge funds are allowed to use leverage and short selling, allowing skilled hedge fund managers to amplify their returns and take advantage of bear markets.
Institutional-level strategies: Hedge funds employ a wide array of investment strategies, such as arbitrage, event-driven, and global macro. These strategies can take advantage of market inefficiencies and exploit unique investment opportunities that may not be accessible through traditional investment vehicles.
Active Management: Hedge funds are actively managed by skilled professionals who can make timely adjustments to their investment strategies based on market conditions and opportunities.
Disadvantages
High fees: Hedge funds typically charge a management fee and a performance fee of profits. These fees can eat into investors’ returns and make it difficult to outperform the market.
Lack of transparency: Hedge funds are not required to disclose their holdings to the public, which can make it difficult for investors to evaluate their investment strategies.
Limited liquidity: Hedge funds often have lock-up periods, during which investors cannot withdraw their capital. This lack of liquidity can make it difficult for investors to access their capital when they need it.
Examples
Bridgewater Associates: One of the largest hedge funds in the world, with assets under management exceeding $100 billion. They use a range of quantitative and fundamental investment strategies to generate returns.
Renaissance Technologies: Known for their use of computer-driven quantitative models to identify investment opportunities in the markets. They have been one of the most successful hedge funds, with returns exceeding 70% in some years.
Citadel: A Chicago-based hedge fund with a focus on long/short equity strategies. They have been successful in generating consistent returns through market cycles.
Analysis
Hedge funds offer several compelling reasons for investors to consider them. With active management, hedge funds can adapt to market conditions, potentially generating better returns while providing diversification benefits.
However, hedge funds come with drawbacks, including high fees, limited transparency, and illiquidity. Investors must conduct thorough research and due diligence, carefully evaluating fund performance, strategy, and risk.
Hedge funds are suitable for those seeking active management, unique opportunities, and potential non-correlated returns, but investors must weigh the benefits against the drawbacks before committing capital.
Alternative #7: “Under The Radar” (UTR) Businesses
“Under the radar” (UTR) businesses refer to equities that are ignored by institutions or analysts for a variety of reasons, e.g. smaller market capitalization. While they are technically not considered as another asset class, their short-term behaviour and performance over time can be significantly different from blue chip companies.
History
The concept of investing in smaller, lesser-known businesses gained popularity as top fund managers, like Peter Lynch, showcased the potential for success in this approach. Lynch’s impressive track record managing Fidelity’s Magellan Fund highlighted the value of thoroughly researching and investing in companies regardless of their size.
His emphasis on identifying undervalued smaller businesses and his remarkable returns from such investments inspired other investors to explore under-the-radar opportunities.
By recognizing the growth potential and market inefficiencies in these lesser-known companies, Lynch and other successful fund managers played a significant role in popularizing the idea of investing in UTR businesses. Their stories showcased the rewards that can come from identifying and investing in innovative, undiscovered companies, thus driving interest and adoption of this investment strategy.
Advantages
UTR businesses offer the opportunity to invest in promising companies before they become well-known.
UTR businesses can generate higher returns due to their growth potential.
UTR businesses provide diversification away from traditional investments.
Disadvantages
Lack of coverage: when investing in UTR businesses, investors have to conduct more independent research to ensure they discover any red flags about the business. This is because there might not be a lot of existing research done by analysts.
Long-term holding required: for significant rewards to be seen, investors have to keep the business in their portfolio for 10-15 years (assuming the business continues to do well). Investors need patience and the right temperament for long-term investing.
Greater downside: It is possible for the share price of a UTR business to fall by 80-90% before turning into a multibagger, delivering several times the initial capital. This is where an investor’s conviction in the business will be tested.
Examples
While these are well-known companies now, remember that they did not start out this way. It was only after they experienced tremendous returns that they received a lot of coverage and interest.
Amazon (AMZN): The e-commerce giant has seen remarkable growth over the years, expanding into various industries and delivering substantial returns for investors.
NVIDIA Corporation (NVDA): As a leading semiconductor company, NVIDIA has seen significant growth driven by its high-performance graphics processing units (GPUs) used in gaming, artificial intelligence, and data centres. Its stock price has experienced remarkable appreciation over the years, delivering substantial returns to investors.
Netflix (NFLX): The streaming service provider has transformed the entertainment landscape, captivating millions of subscribers worldwide and generating substantial returns for early investors.
Analysis
Investing in under-the-radar (UTR) businesses has pros and cons. UTR businesses offer growth potential, as they often have higher growth prospects and undervalued opportunities. Early entry allows investors to benefit from emerging trends. However, UTR businesses come with higher risk due to limited track records and potential market fluctuations.
Nonetheless, we discuss many of these issues and walk you through how to assess such businesses in our Investing Fundamentals 2.0 course here.
Our Personal Favourites
After considering the alternatives, we’ve concluded that Under The Radar businesses and Options are our top picks for blue chip investment alternatives. This is because they combine an ability to generate cash flow while creating potentially unlimited rewards over the long-term.
Additionally, these assets are relatively liquid compared to the other investment alternatives, removing the hassle of trying to find buyers and sellers. Most investors have better things to do instead of managing transactions!
If you’d like to find out more about investing in such businesses and using options to generate cash flow, you can check out our Investing Fundamentals 2.0 and Options Cashflow Series in the links here.
Unveiling Our Top Picks: The Best Blue-Chip Alternatives
No content herein shall be considered an offer, solicitation, advice or recommendation for the purchase or sale of securities, futures, funds or other investment products. It does not take into account your investment objectives, financial situation or particular needs.
All information and data, if any, are for reference only and past performance should not be viewed as an indicator of future results. It is not a guarantee for future results. Investments in stocks, options, ETFs, funds and other instruments are subject to risks, including possible loss of the amount invested.
The value of investments may fluctuate and as a result, investors may lose the value of their investment. Please consult your financial adviser as to the suitability of any investment.
This article has not been reviewed by the Monetary Authority of Singapore.
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