The uncertainty swirling in today’s economic environment is palpable – inflation, recession, high-interest rates, supply chain issues, and high gas prices. To some, it’s deja vu of the Jimmy Carter ’70s again.
So, what’s a reasonable return in this environment? With the Dow down more than 20% year-to-date and Bitcoin down nearly 60%, many on Wall Street will have you believe that anything generating a positive return right now offers a reasonable return. But is it?
Financial advisors tend to push clients toward fixed-income assets in times of distress. The idea is that these “low-risk” products will best preserve assets during volatile times. But are they low risk?
Risk, in simple terms, is the possibility of something bad happening. In uncertain times, the risk is perceived as the lesser of two evils. Given a choice between losing 20% on the stock market, 60% in crypto, or earning 3.72% on a 10-year treasury yield, the treasury would be the lesser of three evils, but is it truly low risk, and does it offer a reasonable return?
Here’s the problem with “low-risk” fixed-income assets like treasuries, CDs, money market accounts, and high-yield savings accounts. With a 10-year treasury offering the best returns of any of those products right now, when factoring in inflation, you’re losing money. Inflation hit 8.3% in August, a little off the 9.1% inflation rate in June, which was the biggest increase in four decades. When factoring in inflation, the 3.72% yield on a 10-year treasury generates a loss of -4.58% annually.
If the risk is the probability of something bad happening, I would say that losing 4.58% per year is pretty bad. But Wall Street doesn’t see it this way. Wall Street wants you to believe that an asset is a low risk as long as you see a positive return. It’s part of the whole risk-return spectrum you’ve been fed from multiple sources your entire life – from your parents to the educational system to Corporate America and Wall Street. The idea is that anything offering high returns comes at high risk. If you want something safe (i.e., low risk), you may have to settle for lower returns, but at least you’re not losing money.
It’s human nature to fear what we don’t understand. Take nuclear energy, for example. Many people don’t want a nuclear power plant in their backyard because of the perceived dangers. But here are two debunked myths about nuclear power plants that should alleviate some fears.
Myth #1: Nuclear energy is not safe.
Truth: Nuclear energy is as safe or safer than any other form of energy available. No public member has ever been injured or killed in the entire 50-year history of commercial nuclear power in the U.S.
Myth #2: Nuclear energy is bad for the environment.
Truth: Nuclear reactors emit no greenhouse gasses during operation. Over their lifetimes, they result in comparable emissions to renewable forms of energy such as wind and solar. Nuclear energy requires less land use than most other forms of energy.
The Truth About Alternative Investments…
What if I told you an investor could earn returns of 12% + in this economic environment? Wall Street will tell you that those returns would come at high risk.
Like nuclear power plants in the energy world, alternative investments are often misunderstood and labeled complex by Wall Street. Because they’re misunderstood and considered complex, alternative investments are often labeled high-risk. But, if they’re high risk, why do ultra-wealthy and institutional investors gravitate towards them in good and uncertain times? What do they know that the rest of the investing public doesn’t know?
For the sophisticated investor, there’s no mystery surrounding alternative investments – especially the two asset classes most favored by the ultra-wealthy – commercial real estate and investments in private companies (i.e., private equity). These investors have discovered that these alternative investments can enhance returns while reducing risk. And it seems more and more investors are bucking the Wall Street notion of risk and jumping on the alternative investment bandwagon.
Alternative investing has grown significantly over the last decade, with assets under management (AUM) rising from $4 trillion in 2010 to over $10 trillion in 2020. By 2025, AUM in alternatives is expected to grow to over $17 trillion.
So if alternative investments are such high risk, why are more and more investors turning to them?
Because they’re discovering what wealthy investors have known for decades: the risks of investing in alternative assets can be mitigated by investing in the right assets (i.e., commercial real estate and income-producing private equity) and partnering with the right co-investors.
Is 3.72% a reasonable return? Wall Street would have you believe it is because you should allocate low-risk assets in this volatile environment. Smart investors would say otherwise, where returns of 12%+ can be achieved at minimized risk with the right alternative assets.
Don’t settle for losing money when factoring in inflation. Consider investing with the right partners in the right assets that offer above-market returns at reduced risk. These assets exist; you just have to break Wall Street’s perception of risk to embrace them.
Register To Join Me on Wednesday, October 5th for a free webinar where we talk about investing to beat inflation and certainty in 2022.