Nov 06 • 4 min read
Are Private Investments Right for You?
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After a strong run, “alternative” investments (anything other than traditional stocks and bonds), are back in the spotlight. From private equity to crypto to gold, investors are once again asking: Should I get in? It’s a fair question. These assets are often marketed as exclusive opportunities once reserved for the ultra-wealthy. And with private investments now creeping into 401(k) plans, it’s easy to feel like you’re missing out. But before chasing what’s shiny or new, it’s worth pausing to ask: Are these really smart investments for everyday retirement savers? In my view, while everyone should have the freedom to invest however they want, most people probably shouldn’t. Before I share why, did you catch this week's podcast? Why Speculation Isn’t Strategy1) Private Equity: The Buffet Line Problem For decades, private equity was an exclusive club, open only to institutions and the ultra-wealthy. Now, with new rules making these funds available to everyday investors, it’s being marketed as a win. Finally, a chance to “invest like the rich.” But here’s the catch: not all access is equal. Imagine a dinner buffet where the line is organized by net worth. At the front are billion-dollar funds and major institutions who get first pick of the best deals. By the time most investors reach the table, what’s left are the scraps. That’s how private equity access really works. The top-tier funds—the ones generating the eye-popping returns you see in headlines—are rarely open to the public. What’s typically left for Main Street investors tends to be expensive, illiquid, and underwhelming. So while “investing like the rich” sounds appealing, the reality is that you’re probably standing at the back of the buffet line, paying premium prices for cold leftovers. 2) Crypto: The Greater Fool Test As bitcoin prices climb, enthusiasm and interest follows. Naturally, this pushes prices higher… for a while. But here’s the uncomfortable truth: crypto doesn’t produce anything. There are no profits, no dividends, no cash flow. The only way (and I repeat, the only way) prices can keep rising is if more people want to buy it at ever-higher prices. That’s the greater fool theory at work, which is the belief that there will always be someone willing to pay more for the same thing. And since there’s no underlying cash flow or intrinsic value driving prices, crypto is, by definition, a speculative asset. Contrast that with equities (stocks). Stock prices tend to rise and fall with earnings. Unlike crypto, stocks don’t need more buyers to become more valuable, just more profits. If I own 100% of a business that continues to grow its profits year after year, its value increases even if I never sell a single share. That’s because stock prices rise mostly (though not exclusively) for mathematical reasons, not popularity. To be fair, broader adoption is happening, which helps explain crypto’s recent price surge. But at what point does adoption stall once investors realize there’s little (if any) intrinsic value on the other side? And more importantly, who’s left holding the bag when it does? 3) Gold: All That Glitters Isn’t Growth If you can, set aside the small detail that it took gold more than 44 years to finally catch up with inflation after its 1980 peak. That fact alone should give most investors pause. Regardless, gold is another speculative asset that depends on broader adoption for its price to rise. Like crypto, it produces nothing, which means the only way its value increases is if someone else is willing to pay more for it. In his 2011 shareholder letter, Warren Buffett compared productive assets (like stocks) to non-productive assets (like gold and crypto). I thought I’d share an updated version of his insight here. It’s a timeless framework for evaluating what truly drives value in an investment. *** “Today, the world’s gold stock is about 215,000 metric tons. If all this gold were melded together, it would form a cube of about 73 feet on each side. (Picture it fitting comfortably within a baseball infield.) At $4,000 per ounce—gold’s price as I write this—its value would be about $28 trillion. Let’s call this investment pile A. Now, let’s create a pile B costing an equal amount. For that, we could buy all U.S. farmland and assets worth about $3.6 trillion (producing more than $500 billion in farm products per year, plus the entirety of the eight largest publicly traded stocks in America (including Nvidia, Apple, Amazon, etc.), which collectively produce hundreds of billions in profit per year." Buffett continued to share more staggering numbers, but I’m trying to keep it short, so here’s Buffett’s takeaway: "Admittedly, when people a century from now are fearful, it's likely many will still rush to gold. I'm confident, however, that the $28 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.” *** Bottom LineAlternative investments will always attract attention, especially when markets are choppy or headlines promise “exclusive” opportunities. But it’s important to separate allure from evidence. Productive assets (businesses that generate earnings) remain the true long-term wealth builders. Speculative assets like crypto and gold depend entirely on someone else’s willingness to pay more tomorrow. There’s nothing wrong with curiosity or even a small speculative bet, but for serious retirement planning, your portfolio should be built on math, not momentum. 📚 What I've Been Reading
Thank you for reading! Please reply to this email with comments, questions, and/or feedback. Stay wealthy, Taylor Schulte, CFP® |