Today we’re going for a stroll through the neighborhood. We’ll start by walking down Wall Street. You may not realize it, but you know this street very well. You’ve been hanging out here for years.
It’s likely that when you were growing up, the only financial education you received came from Wall Street. They told you that the smartest thing you can do is invest in stocks, bonds, mutual funds, and a 401(k). Work 9 to 5 ‘til 65. Then, BOOM, you can retire and live out the rest of your days sipping a coconut drink on the beach. Sounds great — or does it?
First of all, for most of us, “nine to five” is a pipe dream. We’re working more than that. Second, do we really want to spend the best days of our lives slaving away on Wall Street?
Most of us go to school to learn how to work, but of course, we aren’t provided any real financial education. We do this for about 20 years, then we work, work, work, like a Rihanna song on repeat, for 40 years. If we’re lucky enough to live the average American lifespan of 78 years, we sip from coconuts for 13 years. That’s assuming that we’re physically and mentally healthy enough to do so.
As all this time goes by, Wall Street’s financial advisors, stockbrokers, mutual and hedge fund managers make money off of your hard work whether they provide returns to you or not. These are the people who promise that they can beat the stock market fail 95% of the time. This is according to SPIVA (S&P Indices vs. Active) who keeps a scorecard of the performance of professionally managed funds vs. the S&P 500.
You can expect average returns from Wall Street. You can research thousands of data points and different studies, but over the long run, bull, and bear, you should expect around a 5% return.
Additionally, Wall Street doesn’t look like a freeway in North Dakota. It looks more like Lombard Street in San Francisco. It’s curvy, up and down, and volatile. Remember 2001? 2008? How about March of 2020?
Main Street, on the other hand, looks a little different. There is hustle and bustle, but people are enjoying their day. This is the street you knew about growing up, but maybe you didn’t think it was possible to get here. Maybe you thought real estate, private equity, or owning your own business was too expensive, too risky, or too much work. But that’s because you’re used to Wall Street telling you how to invest.
I’m here to tell you that you can walk on Main Street all day. All are welcome. It’s not too expensive. You need money to invest, of course, but you don’t need millions of dollars. It’s not too risky.
This is how the ultra-wealthy and institutional investors invest. It’s not too much work. Depending on the investment vehicle you choose, it can be completely passive, with just a little bit of legwork upfront in order to make educated decisions.
And the payoff? Well, we need to beat that volatile 5% from Wall Street. Here’s a secret. What Wall Street investors don’t know is that high returns of 8%, 9%, and beyond are not only realistic, but probable. You just can’t find these returns on a consistent basis on Wall Street. They exist in private markets on Main Street.
The historic problem on Main Street is that there hasn’t previously been a road map showing how to get there. Investing in Main Street was not openly available to the general public. However, times are changing, the map is available, and people are flocking to Main Street.
The SEC recently expanded the definition of an accredited investor to effectively make private investments more accessible to a greater pool of qualified investors.
In late 2019, Mark Wiseman, the global head of equities at BlackRock, Inc., one of the world’s largest investment management firms with $6.9 trillion in assets under management, reported that 50% of BlackRock institutional investors are actively reallocating their assets from public to private markets. In other words, from Wall Street to Main Street.
In mid-2020 at the PLI Investment Management Institute 2020, Dalia Blass, the Director of the Division of Investment Management at the SEC made a stunning suggestion: Individual investors need more access to private markets — specifically through their 401(k)s. Maybe it’s no coincidence that Ms. Blass’ speech came at a time when many 401(k) participants saw their portfolios plummet in the onslaught of the COVID-19 pandemic. It’s been a roll of the dice at the craps table ever since.
The Value of Private Investments
The message is clear: Private investments should be a bigger part of your asset allocation. The value of private investments in alternative assets like commercial real estate, private equity, and commodities is nothing new to institutional investors like private pension plans and university endowments. They have known for decades that private investments in alternatives offer cash flow, capital growth, and wealth preservation, which are fundamental in recessionary times.
The ultra-wealthy and institutional investors have always favored the private markets — not only because of their non-correlation to Wall Street, but for the types of returns not found on Wall Street.
One such example is the Yale University Endowment, which invests heavily in commercial real estate because of its superior returns, lower risk, and low correlation to Wall Street. In 2018, while the S&P was down 4.38%, the Yale Endowment reported a return of 12.3%. Another example is Tiger 21, a private investment group that requires its investors to have at least $10M in investable assets.
Main Street private investments in alternative assets like commercial real estate offer the two pillars of wealth-building — cash flow and capital growth. Wall Street public equities just can’t compete. Consistent income, appreciation, and non-correlation to Wall Street are why Main Street private investments can offer investors above-market risk-adjusted returns.
The Wall Street mob will tell you that you must have a higher tolerance for risk to invest in Main Street alternative investments. This is simply not true. They’ll tell you that if you are risk-averse, to stay the course, take your volatile 5%, 9-to-5 ‘til 65, and sip your coconut.
I’m here to tell you there is a different way. Follow me to Main Street. Achieving above-market risk-adjusted returns is not just possible but probable — and likely.
About the Author:
Seth Bradley is a real estate entrepreneur and an expert at creating passive income while still working as a highly paid professional. He’s the managing partner of Law Capital Partners, a private equity firm focused on multifamily and opportunistic acquisitions. passive income attorney
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.