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Passion Investing: Is it a good diversification tool? Find out

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© Provided by The Financial Express The market is not only small, but opaque, highly fragmented, as well as unregulated, and usually have issues like illiquidity and valuation subjectivity.

Investment is not always just about stocks, bonds, etc. Apart from such traditional investment options, an increasing number of people are investing in non-traditional types of assets, such as jewellery, fine art, vintage cars, wine, etc.

Industry experts say these investments are items that people are passionate about and enjoy owning. Investing in such assets will also help them make money at the same time, as the value of these items appreciates over time. Investing in such non-traditional assets that one is passionate about is termed passion investing. Passion investing is an ideal way to create long-term investment strategies that could be rewarding for the investor.

Prashant Joshi, Co-founder, Fintrust Advisors LLP, says, “Passion investing can be an effective way for portfolio diversification when done correctly. It has transitioned from a hobby to a lifestyle to investment over decades. In Passion Investment, the word passion is followed by investment; hence it should be considered a passion first and investment later.”

Having said that, one should keep in mind that this type of investment is speculative, therefore can not guarantee a return. Passion investing can be an effective way for an individual to diversify his/her investment portfolio, at the same time enjoy their wealth and satisfy their desires while making money when the value of these items increases over a period of time.

Investment strategy

Passion investing should only be considered a long-term investment strategy and a part of a broader wealth management strategy. Joshi says, “While investing in such type of assets, it is best to choose the asset that the investor loves and have knowledge of.”

He further adds, “One should look at how different passion investments have performed over the past ten years and then buy the assets they are passionate about considering it has the potential to appreciate. It is prudent to build it over time and diversify within this sub-asset class rather than putting all eggs in one basket.”

For instance, with investment in art collection, experts say investors could allocate 3-5 per cent of their portfolio, and gradually increase up to 10 per cent of the portfolio, as a sub-asset class.

Are these investments volatile in nature?

The value of these assets generally, does not rise and fall simultaneously as the stock market, so experts say they could help minimize the pain of stock market downturns. In addition, these types of investments typically tend to do well during times of economic uncertainty. However, note that their financial returns are far from assured or predictable.

Things to be aware of

Passion investing could be highly attractive, but there is also a high level of risks involved, as passion investing are substantially different to other investment markets. Industry experts say detailed due diligence is vital for any investor, as the available market intelligence and public information about such investment may be limited.

Additionally, it is imperative to know the asset, the seller, hidden costs, and the asset’s authenticity. “The market is not only small, but opaque, highly fragmented, as well as unregulated, and usually have issues like illiquidity and valuation subjectivity. A comprehensive due diligence process and experienced legal and transaction counsel can help investors take informed investment decisions and mitigate risk,” adds Joshi.