Despite the harsh macroeconomic environment, over 20 million people are set to become millionaires in the next few years. This will be no thanks to the public markets, however, as the bull market from 2009 to 2022 is unlikely to repeat.
Allianz calls the years before 2022 “the last hurrah” for the public markets, and investors looking for higher returns and more diversified portfolios are increasingly turning to the private markets.
To succeed in a more challenging investing environment, here are 10 New Year’s resolutions that could help strengthen your portfolio.
1. Invest Beyond Public Equities
The 60-40 portfolio was the golden standard of investing for decades, but it is no longer sufficient for investors looking for higher returns. In the next decade, the S&P 500 is projected to return a mere 6% average annualized, while bond returns fail to even keep up with inflation.
In comparison, the median private equity fund returns a net IRR of 19.5%. The good news is that private markets are becoming more liquid, accessible, and with lower capital minimums than ever before. Accredited investors can now explore private markets with confidence and strengthen their portfolios.
2. Seek Out Strategies That Expand Your Portfolio of Managers
Many investors are familiar with the concept of investing in “winners” and “losers.” The problem, of course, is that it’s impossible to know which will be which ahead of time.
Instead of gambling on a single manager, a better approach is to build a portfolio of managers across vintages. This way, you diversify your portfolio over time and increase your chances of successful investments.
First-time managers and smaller funds, in particular, have historically outperformed larger, more established funds. This is because they are often hungrier, more agile, and have greater access to deal flow–as it’s easier to find a good deal when fewer people are looking.
3. Demand Active Management
Passive ETFs and index funds became wildly popular in the 2010s bull market. When markets are going up, it’s easy to invest passively and make money.
But when markets become more volatile, passive investing can lead to significant losses. 2022 was a cautionary tale of this, as passive 60-40 investors lost the most money of any year in recent history.
Investors should demand that active management be part of their portfolios. This means getting behind managers who do the work to advance their portfolio companies. Active management is truly the way to reap the rewards of the private markets, and it’s part of why private funds consistently outperform public markets.
4. Level Up Your Alt Exposure
The world of alternative investing platforms has exploded in recent years, making it easier than ever for accredited investors to diversify their portfolios with alternatives.
But many investors take a “spray and pray” approach to alternatives, investing in the likes of a fractional piece of art, a luxury watch, or even a bottle of fine wine. While these individual investments may be exciting, they don’t make for a strong investing strategy.
Instead, investors should invest in a diversified portfolio of alternative assets that have meaningful real-world economic value. This could include investments in real estate, venture capital, private equity, and hedge funds.
5. Re-examine Your IRA
Many investors overlook the private markets when it comes to retirement savings. They stick with stocks and bonds, unaware of the potential of private markets to generate higher returns for retirement.
Dangerously, some retirement investors become aware of the ability to invest in individual stocks, cryptocurrencies, and other speculative investments within their retirement accounts. While this may be tempting, these investments are far riskier than relying on professional managers in the private markets.
Individual investors consistently underperform market averages by a wide margin. Investing in diversified private market investments within your IRA could help you generate higher, more consistent returns and build a more secure retirement.
6. Get Out of the Spreadsheet / K-1 Cycle
Investors in the private markets are all too familiar with the pain of manually tracking portfolios in spreadsheets, managing a multitude of K-1 tax forms, and reconciling them with their taxes.
It’s time to get out of the spreadsheet cycle. In 2023, you expect a great online experience in every other part of your life–the same should go for alternative investing.
Accredited investors should look for online platforms that offer a consolidated view of their entire portfolio, automated tax management, and direct access to their investments. With Gridline, investors can get all this and more.
7. Invest in Funds, Not Individual Deals
Investors may be tempted to invest directly in individual deals instead of funds. The truth is direct investing is far more dangerous than investing through a fund. When you invest directly in a deal, you are taking on an enormous amount of risk by putting your money into an illiquid asset with no diversification.
It’s also important to remember that most individual deals will never hit the returns you expect. Investing in a broad portfolio of funds is the only way to gain real diversification and potentially generate higher returns.
8. Diversify Beyond the U.S.
The United States saw an impressive bull market for over 13 years, and many investors are unaware of the risk they’re taking by not diversifying beyond U.S. borders.
There are around 6.1 million businesses in the US out of 333 million firms worldwide. Investors should diversify their portfolios to include investments in these non-U.S. markets, so they can benefit from the growth potential they offer.
9. Invest in Funds With Low Fees
Fees might not seem like a big deal, but they can eat away at your returns and even turn a winning investment into a mediocre one.
It’s essential to read the fine print and understand the fees associated with an investment before you commit your money. Many investors are unaware of the hidden fees, such as management fees and performance fees, that could cost significant amounts over time.
Gridline charges a management fee of just 50 to 100 basis points annually, with the fee varying based on total assets under management. This fee is well below an investor’s actual cost to evaluate and select managers. We also don’t charge carried interest.
10. Look Beyond IRR
Looking purely at a manager’s past IRR can be dangerous. It’s important to compare performance to a customized peer group of funds with similar investment styles and strategies. This allows investors to make informed decisions and select funds with the highest potential for success.
It is equally important to look at the people behind the funds, their process, and their philosophy.
Beyond performance entirely, it’s also essential to understand if a team possesses unique skills and capabilities, such as proprietary deal flow or special access to capital. Further, the team’s investment process needs to be repeatable; only then can the team generate consistent returns.
The team’s philosophy should also be consistent with a long-term outlook. Short-term speculation can often be a way to disguise the lack of excellent skills, while long-term investments are associated with better risk-reward outcomes over time.
Takeaways
The investing landscape changed dramatically in 2022. The extended bull market of the 2010s is unlikely to repeat, and investors need to adjust their strategies to serve them in a new investing environment.
These 10 New Year’s resolutions could help you strengthen your portfolio and make it more sustainable for the next decade and beyond. With Gridline, accredited investors can access top-quartile investments with low capital minimums, fee transparency, and greater liquidity.