Nick Maggiulli writes an insightful blog on personal finance often with views backed by rigorous data analysis. In this blog, he talks about alternative investments which refer to private equity, venture capital, real estate funds, private credit and collectibles like art and the pros and cons of the same.
“While each of the asset classes listed above will have a different correlation with stocks, bonds, and cash, the hope is that these alternative asset classes will provide a diversification benefit that you cannot get anywhere else. As a result, investing in alternatives should improve your returns while also lowering your portfolio’s overall volatility.”
What are the disadvantages?
“One of these costs is less liquidity. Unlike publicly traded stocks and bonds, alternatives can be difficult to sell quickly or at a reasonable price. As a result, your capital can be locked into an alternative investment for much longer.
In addition, alternatives tend to have higher fees and higher minimum investment requirements than traditional asset classes.
…Lastly, many alternatives are less regulated and more complex than traditional asset classes. As a result, it can be difficult to understand how they work and the exact risks you might be taking.”
Then why do high networth individuals invest in alternatives:
“First, the wealthy tend to invest in these alternatives after they’ve already become wealthy. Otherwise, how else would they afford the large minimums that are typically required to invest? Second, many of the supposed benefits of these asset classes may not be as advertised.
For example, one of the primary reasons to invest in alternatives is due to their low correlation to traditional asset classes. Unfortunately, this “low correlation” may simply be an artifact of how often the data is collected. If your assets are less liquid and you value them less often than traditional assets, then they may seem less correlated to traditional markets even though they aren’t.
…After all, if the economy isn’t doing well, it’s highly unlikely that your private equity, real estate, and venture capital investments will be thriving.
Nevertheless, even if these assets don’t provide the low correlation they promise, the ultra-wealthy will still invest in them. Why? Status. There’s nothing sexy about buying an index fund. But put your money into private companies that you can’t find anywhere else and you’ve got yourself something you can sell. If you find this exclusivity appealing, I get it. However, you should find another way to get your status fix and leave your portfolio out of it.
…Ultimately, the key to building wealth isn’t in any specific asset class. It’s in the power of consistent, disciplined investing over time.”
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
