If you’ve made it this far in our series, you now understand the benefits and opportunities of investing in the private markets. You know what private investments are, who makes them, and how they are accessed. You are aware of the varying asset classes and their role within your portfolio. But the potential of high returns almost always comes with high risk. Here in our final installment, we’ll cover the risks to understand before moving forward with your entry into the private investment world.
Private investments can lock up your money for ten or more years in some cases. While there are normally small amounts of your investment you can redeem along the way, most of your money is tied up. This illiquid nature causes risk to you and your personal wealth, especially in the face of job loss or unexpected expenses. It’s smart to try to plan for unexpected scenarios before tying up too large a portion of your money for an extended period of time. That being said, illiquidity can also offer less volatility than typical public market investments, as well as much higher returns.
Private investments are highly active investment vehicles. Smart people behind the scenes are analyzing, doing due diligence, and constantly trying to gain an edge over the competition with their investment strategies. Therefore, be prepared for higher fees than you would see in a portfolio of more passive investments. The argument for these high fees by active managers focuses on the promise of a high net return. However, if a fund is underperforming over time under the yolk of those high fees, your return itself will be eroded. This is why it is so important to have a firm like Denver Private Wealth Management doing the due diligence necessary to vet worthwhile investments and the costs associated.
One of the most attractive aspects of private market investments is the potential for high levels of returns within this flourishing $6 trillion industry. However, as the private market industry continues to mature and more capital is pumped in, dilution of returns may occur as it becomes harder and harder to find the “diamond in the rough” type investments we mentioned earlier amid the growing popularity.
While public investments trade daily and constantly have a price assigned to their value, that is not the case in the private investment world. Usually, at best, private investments will have a value assigned to them once a month. The less frequent pricing of private investments helps artificially tamp down volatility as the price will not fluctuate as much as investments can in the public market. This doesn’t necessarily mean less risk, simply less day-to-day fluctuation in price. This can be important from the emotional standpoint of the investor and be seen as an advantage. However, the tradeoff is less consistent knowledge of the true value of your investment until the distribution of the fund at the end of its life. In more practical terms, you’ll see a delay on the return of your portfolio, and it might be Q3 before you receive your Q1 return.
Private markets open up a new universe to today’s investor, less correlated with the core of their portfolio. With several asset classes available – each intended to accomplish varying investment objectives – private investing offers an alternative to the crowded public markets. Of course, as we have noted, there are additional risks involved. However, the potential for strong returns can be attractive for sophisticated investors with long term investment objectives and resources. As more capital flows into this burgeoning landscape, the competition will become stiffer. Investors must be nimble and knowledgeable. Now that you have a grasp on the private market landscape, it will be easier to start the real conversation to determine if you’re ready to participate. There’s no one-size-fits-all answer for investing your hard-earned wealth, but diversified strategies can be an important component of consistent growth. If this series has piqued your interest in private investments, let’s talk about it. Contact Denver Private Wealth Management with your questions and we’ll discuss the options that best fit your individual portfolio.
Denver Private Wealth Management is an independent fee-based financial planning practice with 50+ years of experience in the financial industry. DWPM customizes portfolios based on your financial goals and works closely with you, your tax advisors and estate attorneys to form a comprehensive view of your financial situation. For more information or to set up a free consultation, contact us at firstname.lastname@example.org.
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