Considering the multiple factors at play, it’s unlikely that things will begin settling down anytime soon.
After battling rising prices for more than a year, the inflation rate hit a 40-year high in February 2022. Since then, the Russia-Ukraine war has further contributed to high commodities prices, such as wheat, corn and crude oil. Strict economic sanctions placed on Russia in recent weeks are also likely to have a lasting effect on the global economy, to an extent that’s still difficult to predict.
Meanwhile, foreclosure rates are up 129% from last year after hitting an all-time low in 2021 while mortgage rates are climbing and home sales are dropping. To combat inflation, the Fed announced the first rate hike since 2018 this week, although many are saying it’s not enough.
The top meme stocks of 2021 are desperate to keep retail investors hooked. AMC Entertainment Holdings Inc made a wild play and bought a struggling gold mine rather than pay down its more than $5 billion in debt, and Gamestop Corp. is launching an NFT marketplace after disappointing investors with its fourth-quarter earnings.
While all of this chaos has many investors running back and forth trying to catch whatever wins they can, several others are choosing to step away and let their money ride in private market investments that have little correlation to the stock market.
Rise of The Private Markets
Most private market investments have historically been out of reach for the majority of individual investors. Investing in real estate, private companies and other alternative investments has been reserved for ultra-wealthy and institutional investors.
However, technology and changes in regulations have allowed companies to open up a range of private market investments to both accredited and non-accredited investors.
Structured notes have been used by institutional investors for years to earn high yields while gaining downside protection when the stock market is weak.
Commercial real estate has long been a favorite investment among private equity firms and hedge funds. The commercial real estate market has historically been much less volatile than the stock market and can also provide consistent cash flow throughout all cycles. While REITs used to be the only option as a passive investment in this asset class, several real estate investment platforms have a variety of offerings for private market real estate investments ranging from $100 to $100,000.
Private companies are now seeking investments from individual investors through various crowdfunding platforms, and Title III of the JOBS Act has made it easier for companies to raise capital from the general public. While these are probably the riskiest investments someone can make, they also have some of the greatest upside potential.
Farmland is becoming an increasingly popular investment since Bill Gates made headlines last year as becoming the largest private owner of farmland in the U.S. The fact is, the U.S. is losing over 1 million acres of farmland each year while the global food demand increases. Farmland investment platforms now allow accredited investors to gain direct access to this asset class.
The Downside to Private Market Investments
Private market investments aren’t right for everybody, especially those with short-term investment goals. The major drawback to this type of investment is the lack of liquidity. Investors can’t sell their shares on a major exchange like they can with stocks.
Structured notes typically have investment terms of two years, while commercial real estate and farmland can have holding periods of five to 10 years before equity is returned to investors. Most private company investments don’t have a holding period at all. Investors typically hold their shares until the company is eventually acquired or goes public.
Investors that choose private market opportunities are usually comfortable leaving their money tied up for several years and don’t anticipate any liquidity needs. They’re also comfortable investing with companies that aren’t required to meet the same regulatory standards as publicly traded companies.
While private market investments require a longer-term commitment than investing in the stock market, they can also provide investors with a more predictable return and some relief from today’s stressful market conditions.
The point of investing in alts is to adjust the risk weighting in a portfolio, so advisers need to identify the risk they're seeking to address, said panelists at the Morningstar Investment Conference.
4 months, 2 weeks ago