Even though institutions have been investing into alternatives for decades, it is estimated that individuals invest anywhere from 2-10% toward alternatives (and that’s individuals who HAVE invested into alternatives in the first place). Compare that to the average pension fund being 25-35% or endowments and foundations often allocating 35-50%- there’s a huge difference.
Now, individual investors will not and probably cannot allocate as much capital toward alternatives as institutions can, but many should still consider more (or at least some) exposure into the space! Here’s a few reasons why:
1. The 60/40 portfolio isn’t performing
The traditional and most common recommendation from any financial advisor is that 60% of assets into stocks and 40% into bonds would protect investors and grow their assets. This strategy may have worked at one point in time, but times have changed and so should investment strategies. Right now, anyone with the 60/40 portfolio might be feeling frustrated and looking for a solution. Diversifying a percentage toward alternative investments might offer less liquidity but in exchange for a higher return profile.
2. Diversification is needed, period.
I’m not saying that people should stop investing into stocks and bonds, they definitely still should, but they need exposure to other assets to achieve what I mentioned above- protection and growth. Diversifying a portion of assets into alternatives can support an overall investment portfolio.
3. You get to impact companies.
When you buy a stock, that company probably never sees that money; another stockholder does. And ultimately, you did not change their bottom line.
When it comes to early-stage investing, you actually make an impact on the companies. That could look like buying a prototype, paying for x employee’s salary, or sustaining growth to reach a new innovation.
I love this video and quote from David Vulcano, President of Music City Angels and promoter of investing into startups:
“You think Pfizer saw your money when you bought that stock from your TD Ameritrade? Pfizer didn’t see that money, the guy who owned the stock before got your money. Pfizer didn’t get any piece of that. Outside of rare opportunities like an IPO or something like that where they actually get the money and deploy, you’re really not investing in that company in the true form of investing.
But you take a startup company that you can see, that you can talk to them and say, ‘Hey, I’m going to give you $50k or 100k or 200k or 300 or 400 or more.’ Then they come back to you and say, hey, look here’s the prototype that you bought. Your money bought that. You see these three people here? There’s three jobs that your money created. Wow. That is something. My money actually went and did something and didn’t just go to another investor out there like it does in the stock market.”
4. Venture and other alternative returns don’t necessarily follow the public markets.
Unlike traditional stocks, bonds and even crypto, venture capital funds are not correlated to the equity markets.
In fact, long-term correlation between VC returns and the market (Nasdaq and S&P 500) is very weak. Diversification is king no matter what, but can particularly help your assets during times of financial crisis.
5. Align your investment strategy with your passions.
Unless you’re a billionaire, typically, you don’t get a call when you invest in a stock. On the other hand, many funds utilize the expertise and passion of their investors to offer advice and input. There’s plenty of opportunities to invest into funds to learn more about an industry or get to teach others about your expertise as well.
You can also see up close and personal how you are innovating a specific industry that you’re passionate about solving problems in!
-Haley Zapolski, JSF Managing Director