The refrain “there is no alternative” is favored by politicians to market pundits when faced with tough decisions. “TINA” has been used to defend bank bailouts, quantitative easing, and austerity measures. It’s also the basis for many individuals’ investment decisions.
As the stock market enjoyed an unprecedented 13-year bull run following the financial crisis, the TINA mindset prevailed. With interest rates at historic lows and bond yields offering little return, investors believed they had little choice but to take on more risk in search of higher returns.
The ZIRP (zero interest rate policy) environment has changed, with rates now rising and the Fed tightening its monetary policy – which has justified a recent market selloff on the equity side as valuations have come under pressure.
But now, with plummeting stock prices and virtually risk-free bond yields exceeding 4.3%, many investors are questioning TINA. However, more important than the growing attractiveness of bonds is the light TINA has cast on the underlying assumptions of the stock market.
The current macroeconomic picture no longer bodes for equities, not only because of higher rates and inflation but also due to ongoing geopolitical risk, supply chain risks and zero-covid policies abroad, central bank confusion and intervention, and the upcoming US mid-term elections.
TARA: There Are Reasonable Alternatives (just not bonds)
For investors seeking high-risk-adjusted returns, bonds are still not the answer. While bond yields have increased, they still fail to keep up with inflation, let alone generate real legacy wealth.
The valuation resets we’ve seen this year, and those that are to come over the next 6-12 months, provide significant opportunity for private market investing–in both emerging and disruptive technologies (via VC) as well as picking up cash-flowing businesses for much more reasonable multiples (via PE, growth equity, and buyout firms).
These investments don’t need to be tremendously risky to succeed. To be sure, investing in an individual startup is a roll of the dice. But investing in a venture capital or private equity fund exposes you to a portfolio of companies, which decreases your overall risk. And plenty of hedge funds pursue relatively conservative strategies while still outperforming the stock market.
Just as index funds offer a low-risk way to invest in stocks, there are index funds that track private equity and venture capital performance. These funds offer investors a way to participate in the growth of these industries without the need to pick individual winners.
An analysis by the Institutional Investor shows that a private market portfolio of 500 randomly-selected deals significantly outperforms the S&P 500 with even less risk. Real-world returns bear this finding, with the median private equity fund returning a net IRR of 19.5%.
What’s holding investors back?
If private markets offer higher returns with less risk, why aren’t more investors fleeing the stock market?
The answer, in part, is that private markets are still relatively opaque. It can be daunting to assess the riskiness of individual venture capital or private equity fund, let alone an entire portfolio.
Moreover, private markets are primarily restricted to accredited investors, including individuals with a net worth of $1 million or more or annual incomes exceeding $200,000. Most Americans don’t meet these criteria, which leaves them effectively shut out of these investment opportunities. As a Nasdaq article explains, retail investors own about 77% of stocks’ market value.
Even investors with deeper pockets may be reticent to put their money into less liquid investments, assuming they can access them in the first place. While “access-constrained funds” generally enable higher returns, they exclude many potential investors.
Gridline, a digital wealth platform, is changing all of that. Gridline provides a curated selection of professionally managed alternative investment funds and enables access for individual investors and their advisors to gain diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity.