How I Began Exploring the Alternative Investment Frontier and Why You Should, Too
While I have never been one to sit quietly and follow societal norms, early in life I knew success didn’t just happen. My parents both have an insatiable work ethic and I am lucky that their diligent character was passed down to me.
My passion for exploring the unknown follows me in both my professional and personal ventures. I have achieved professional success as an investment banker both on Wall Street and in corporate finance, while in my personal life I am an avid mountaineer and am proud to be one of less than about 120 people to have completed all of the Seven Summits, the highest mountains on each continent.
Most important to me, though, is where I stand now, as CEO and co-founder, along with my wife Meredith Parfet, of Denali Venture Philanthropy. Establishing this fund, which we use to invest in entrepreneurs committed to social change, has always been a dream of mine and I am proud to carry on my family’s legacy of philanthropy with a modern and innovative approach.
I start this article by sharing my successes because what I want to share next is just how I’ve gotten here. My time in the finance industry has shown me exactly who I want to be and what I want to stand for. For decades, investors have followed a “one-size-fits-all” approach to wealth management that, with the rapid emergence of new technologies in an ever-changing economy, is now out of date.
In a series of articles, I want to share my insights into the world of wealth management, the problems with the traditional investment model, and how alternative investments provide a broad approach to real growth potential.
The modern stock market provides an opportunity for anyone to start, build, or maintain their “wealth’ portfolio. However, the value it once provided to both companies and shareholders has slowly diminished. The U.S. stock market has seen a sizeable share of companies revert to private ownership, while many public companies provide little diversity and returns less pronounced as they once were.
According to the University of Chicago Center for Research in Security Prices, the number of investable public companies peaked in 1997 at a total of 7,439. That number has consistently dropped every year since, with the exception 2014. At the end of 2017, the number of investable public companies sat at approximately 3,600. That is a very small number given the size of the U.S. population.
The U.S. stock market is not shrinking due to a lack of qualified companies. But unfortunately, there are three primary explanations for this decline: the regulatory environment, the explosion of mergers and acquisitions, and the wider availability of more and varied sources of capital to fund expansion.
At the same time, the stock market has shown strong correlations, especially during times of volatility. Numerous instances dictate this pattern, and with it the average monthly returns of all stocks have declined.
Herein lies the problem. A market with declining diversity and declining portfolio protection provides a lot of risk. Many “growth stocks” have turned to private investors for initial funding and don’t enter the market until they are well-established as companies, reducing stock diversity. The “skill” of picking a winning stock has been rendered less impactful now that they all generally look and feel the same.
If advisors are consistently selling their clients on narrow investment options such as stocks or private equity, then the risk-to-reward ratio will remain high, if not grow, and investors will never have a true opportunity to reap the benefits of their true earning potential.
Actively managed accounts are performing lower than investors using passive or indexing strategies. Passive investing maximizes returns by minimizing the costs associated with buying and selling stocks. By the end of 2017, passive investments represented nearly 45% of all equity assets in the U.S. Just ten years ago, passive funds made up approximately 20% of U.S. equity assets. It has been estimated that by the end of 2020, passive investments will account for more than half of all retail equity flows.
What investors need to look for, and advisors need to capitalize on themselves, is niche investments. Using technology to explore new, alternative ways of investing is the first step towards finding solutions to endemic problems plaguing the wealth management industry.
I have always had my niche. It is important to differentiate yourself from the others, whether in business, investments, or personal ventures. Alternative, niche investments provide an opportunity to find your purpose and move away from the crowd. Don’t pigeon-hole yourself into just one opportunity, or even a series of opportunities within the same tiny investment dot. It is time to scale those summits, think bigger, and invest outside the dot.
The next article in this series will detail the future of the stock market and solutions on pushing the boundaries of traditional investing. The series will conclude with a discussion of the alternative investments approach and how to find your niche.