Diversification is key to successful saving for secure retirement years
Like many of you, I’ve been thinking about what we’ve witnessed in the public markets as the Gamestop story has unfolded. Recent headlines highlight a growing power shift in today’s financial landscape between Wall Street and Main Street. While market manipulation has always been part of the game, the dynamics of that manipulation are changing. The structural flaws in our public market system, long visible to some, are now magnified for all to see.
Beyond the headline noise is this most important point: more than ever before, the gates to real wealth creation are open to all. We should champion accessibility that allows people from all incomes and walks of life to invest how they choose in their financial future.
The “set it and forget it” mentality no longer delivers
Historically, the average person has approached retirement with the “set it and forget it” mindset, relying on traditional financial institutions to invest in public stocks and bonds. Here’s the hard truth: the 60/40 public stock/bond portfolio approach to financial health and stability will only deliver poverty and indignity to tens of millions of Americans over the next 30 years. Why? Because the value of the dollar is depreciating; we’re living longer than expected; and we cannot rely on annual public market returns of 6-8%.
According to Hendrik Bessembinder’s 2018 article “Do Stocks Outperform Treasury Bills?” in the Journal of Financial Economics, if over the next decade stock market returns head toward their historical mean, we can expect a negative 2.6% return. Over the next 20 years, 1.2%.
So what’s the solution?
Diversification is essential
Portfolio diversification is the single most important financial tool for reducing volatility while increasing returns, and investing in alternative assets is the most effective way to diversify. On average, we have 2%-5% of our portfolios in alternatives—from private equity and real estate to loans and cryptocurrency. Professional investors, on the other hand, have approximately 25%-50% invested in alternatives. In order to generate the necessary returns for retirement, average investors cannot afford to rely solely on the public markets. They need to diversify like the pros do.
Take control of your financial future
In the U.S., $33 trillion is held in retirement assets, but only 2%-5% of this is in alternatives. This isn’t so surprising, given how inaccessible, expensive and endlessly frustrating the process of investing retirement funds in alternatives has been. But that’s no longer the case. New technology now makes it simple and inexpensive to access opportunities and use retirement funds to invest in alternative assets that effectively diversify your portfolio.
The conventional wisdom to be conservative when investing for retirement is as strategically flawed as the old 60/40 rule. It makes far more sense to invest an appropriate percentage of your tax-advantaged retirement funds in illiquid alternative assets that have the potential for outsized returns because you can’t touch them before retirement without penalty anyway. By the same token, an individual retirement account is ideal for investing in long-term alternative assets because they can grow, tax-free, throughout your working years.
It’s time to rethink how we approach retirement investing. We need to think with an active, investing mindset, rather than a passive, saving mindset. Doing this has the power to secure and improve not just our retirement years, but the entire trajectory of our working lives.
Eric Satz is the founder and CEO of Alto, a Nashville-based fintech firm.