Does Performance Matter?
Photo by Tearse Photography

Does Performance Matter?

The question is loaded because the industry wants to sell you risk adjusted performance which tells you should accept lower returns over the years so you feel better (but poorer).

In the 1980's Wall Street went all in with Limited Partnerships in real estate and oil/gas income funds and drilling partnerships. When the herd leans in one direction the underlying assets get way over valued and sort of like a Ponzi scheme the last folks in get hammered. Early investors rarely received the promised returns. (Read Serpent on the Rock for an inside look at how the firms mislead their clients.)

We now have Alts (alternative) Investments designed to reduce your portfolio volatility and offering asset classes you have been begging? to invest in like private debt funds and recently "fund Stacking" to get you a little better returns. Many advisors are recommending them as a way of diversifying your portfolio because ......... ?

In my book "Achieving Financial Freedom- A RoadMap for All Investors" I discuss the follies of over diversifying your investments to a point of "Deworsifying" your portfolio. Book available on Amazon Books. Call me and I will send you a copy for free.

How can an investment that charges you 2% annually and takes 20% of the upside each year be good for the average investor? Most Alt fund managers take their performance fee each year that your investments increase in value and in the event they decrease in value they still take 2% until the values eclipse the prior high water mark, if that occurs and then resume taking their performance percent. . When the assets/fund are liquidated the funds typically do not take their 20% cut until you have 100% of your investment returned. That assumes the investment works. If they use leverage (and collect 2% on the borrowed money also ) and the asset class struggles they often liquidate the fund and then reset at zero with new money. Of course you are likely showing a loss and they have their previously earned performance fees on mark ups that you never received.

The other issues are lack of liquidity and in many cases transparency.

Should you have some Alts? If so be prepared to lose access to your funds for 7-10 years so make sure they are a small enough part of your portfolio so you do not get hurt. 30% is way to much in my opinion. 5% is a reasonable allocation so you can tell your friends you invest in alternatives.

If you have multi generational wealth then maybe a larger allocation is ok if you have the expertise to understand the risks and rewards. If you do not understand the strategy stay away.

In my 5 decades in the investment business I have seen many ultra high net worth families get wiped out by the investment strategy deJour. There is nothing wrong with a focused equities approach to out performing the indexes and creating long term wealth. It is not that hard to do.

Over 25 years earning a couple percent better than the indexes means about 100% more wealth than staying with the indexes.

Yes performance really does matter- Want to know the formula feel free to reach out to me for a NO FEE conversation :)


Cheers


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