Worthy Wealth Tips are not investment advice, they are wealth -building guidance.
Welcome to another episode of Worthy Wealth Tips where we introduce new ways to build wealth in a modern, tech-driven economy. Last time we talked about how round-up apps can be used to build nest-eggs even for those of you without cash reserves or access to traditional retirement plans. Today, we are going to be discussing why alternative assets belong in every investment portfolio – yes, even those round-up portfolios. Let’s start with the basics. What are alternative assets and why do you need them?
To explain what alternative assets are, let me start by explaining what they are not. Alternative assets are NOT the asset classes which are found in typical retail investment portfolios or retirement portfolios such as publicly-traded stocks, bonds, and mutual funds including money-market funds.
Alternative assets ARE essentially EVERY other asset imaginable.
Alternative assets can include real estate, venture capital, cryptocurrencies, commodities, NFTs, private lending, options, futures, NFTs, art, or even collectibles like rare wine and baseball cards.
Because alternative assets have been known to enhance overall portfolio returns, they have become an instrumental component of the high net worth and institutional investor’s investment portfolio in recent years.
Assets under management (AUM) for alternatives have more than tripled over the last decade to roughly $13.2 trillion in 2021 and are expected to grow to over $23.2 trillion by 2026 (this amounts to half the size of the US stock market today). Not too shabby for an asset class that didn’t really gain mainstream popularity until about 15 years ago.
And it is not hard to understand why alternatives are so desirable.
Alternatives provide more investment options which in turn strengthen portfolio returns. The more investment options we have, the greater our ability to diversify our investment holdings and the better our risk-adjusted returns become.
But alternative assets do so much more than just add to the NUMBER of investment options we have to choose from, alternative assets also provide another important benefit – they provide exposure to different kinds of assets – assets that are less correlated with conventional stocks, bonds and mutual funds.
You see, publicly-traded stocks, bonds and mutual funds are assets classes that are highly correlated with one another. Meaning, they all tend to move in the same direction during various market conditions. To protect the value of your portfolio, it is essential to have some assets that move in the opposite direction – ones that have a tendency to go up when traditional stocks and bonds are going down.
You have probably heard the saying, “don’t hold all of your eggs in one basket.” It applies to many facets of life but especially to investing. Fortunately for wealthy investors, they have access to all the eggs they ever possibly want. That’s why the rich keep getting richer.
But the same cannot be said for the everyday investors who are trying to save for their future. Those investors only get a very limited number of eggs to start out with. They are only permitted to invest in publicly-traded stocks, bonds and mutual funds as well as a small number of government sanctioned alternative investment products.
Just how miniscule is the amount of investment eggs that non-wealthy/everyday investors are granted? VERY.
Let me break it down for you:
Publicly-traded companies constitute less than 1 percent of all U.S. companies. So non-wealthy investors are already prohibited from investing in over 99% of America’s businesses to begin with.
And to make matters worse, the number of publicly-traded companies have been declining. Since 1996, more than half of our listed companies just vanished – either through M&A or delisting (going out of business or going private like Twitter).
And to add insult to injury, all of the newly added listed companies are going public at staggering valuations - long after the majority of their appreciation had already been captured by privileged investors who get an unlimited supply of eggs and have unfettered access to private equity and VC opportunities.
As a result, America’s most exciting growth companies are no longer appreciating in the retirement portfolios of everyday Americans. Instead, they are appreciating in the coffers of VC and PE firms as well as in the portfolios of the privileged 1% - all of whom have an unlimited supply of eggs.
This wasn’t really an issue when companies used to go public at reasonable valuations.
You may have heard of a company called intel – they make the chips that enable our computers to run.
Intel was incorporated in 1968 and is the company that essentially sparked the entire computer age and in doing so transformed every industry on the planet. It went public in 1971, just 2 years after it was incorporated, at a valuation of less than $60M. $100 invested in Intel’s IPO would be worth over $242,300 today and over $422,700 at its peak.
But companies today don’t go public until they are much older (sometimes waiting over 10 years). During that time, these companies are still raising capital – just not from the public. So all of those opportunities to get in early are realized by venture capitalists and wealthy investors. That’s why early investors in facebook/meta, uber and dropbox were able to capture such insane returns.
But, by the time everyday investors were given the chance to buy stock, these companies have already grown into billion dollar plus companies.
Here’s a staggering statistic….
In order for today’s “growth” companies to return the same post-IPO returns as Intel, they would need to grow into multi-trillion companies.
It’s difficult to comprehend how staggering these numbers are. To put it into perspective, the GDP of the entire planet is $88 T. So in order for Facebook/meta to match Intel’s public market returns, it would have be trading at 5X times the GDP of the ENTIRE PLANET!!!!!!
And by the way, the injustice is not restricted to equities. Private debt returns far exceed public corporate debt as well as government and bank returns. That’s why wealthy investors have been flocking to direct lending. For those who don’t know, direct lenders are non-bank creditors that make loans without using pricey banking intermediaries. That means higher yield to the lender and lower cost for the borrower.
I’m not here to be a Debby Downer. I am here to tell you that things are changing – and for the better.
Fintech innovation is advancing at an unprecedented pace and it is creating more and more opportunities for non-wealthy everyday investors to access growth, yield and, yes, to diversify with Alternative Assets.
So do not fret. For every publicly-traded company that either gets acquired or delists, there will be hundreds if not thousands of new alternative investable products waiting in the wings to replace it. And we will be discussing many of them here on Worthy Wealth Tips. So keep us on your radar!
And remember nothing in this video should be construed as investment advice. We’re not here to recommend specific investments. We’re just here to discuss how technological innovation is transforming finance and what new opportunities are opening up for retail investors as a result.
I hope you enjoy this video. To learn more, please go to Worthy Bonds Dot Com.
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