Monday, December 12, 2011

Lessons from the Lost Decade: Alternative Investing

Posted By: George Deeb - 12/12/2011


& Comment

The last ten years have not been very good to the average investor or the economy: (i) the stock market has basically traded up and down within a tight range, having 401k plans flat; (ii) the real estate market has been plagued with declining home values and foreclosures; (iii) the banks are paying close to zero interest rates on cash accounts; (iv) college 529 plans have not lived up to expectations, requiring additional deposits to catch them up; (v) unemployment is probably double the reported 9% levels when you include "under employed" persons; (vi) healthcare and education costs continue to skyrocket, while salaries have been basically flat; and (vii) consumers are buried under tons of credit card debt, student loans and upside-down mortgages.  Not a pretty ten years, making it near impossible for the average person to accumulate wealth.  This may be the first generation that will actually be financially worse off than their parents' generation. 

That said, plenty of money was made, by people that knew how to take advantage of these conditions:  hedge fund managers that understood how to deal with risk, day traders playing on the high volatility and venture capitalists who bet on smart entrepreneurs with innovative new products and services.

I am challenging everybody to start to rethink their entire investment strategies.  We can't assume that conditions will be any better in the next decade than their were in the last one.  Especially since conditions could actually get worse with a global economic meltdown or fears of a double dip recession in the U.S.  Frankly, people can no longer retire comfortably at age 65, forcing them to work more years, and tying up jobs that otherwise would have opened for the next generation of workers.  And, we can't simply keep doing the "same old, same old" strategies our parents used to accumulate wealth, as those strategies are outdated, haven't worked in the last decade and may no longer work in future generations.  We must plan ahead, in new and unique ways.

It has gotten to the point that I am modeling what would happen if I liquidate my 401k and college 529 plans (both of which are tied to the broader U.S. stock market which has basically been flat for ten years), and reinvesting them more like a venture capitalist would, into early stage companies that are poised for future growth.  If the average venture capitalist experiences a 35-50% annual return on their investment, even with only 1 of 10 investments hitting it big and several startups going out of business, you can drive a materially higher long term portfolio value in the next ten years, even after paying any 10% early withdrawl penalties or required taxes.

But, venture investing is not for everybody.  Maybe you don't have that level of appetite for risk?  Maybe you are not tied into deal flow for hot startups?  Maybe you are not an accredited investor?  But, if you are open to thinking out of the box, there are plenty of websites out there that can help you get started.  This includes: (i) AngelList, the marketplace for startups and angel investors; (ii) Kickstarter, to find startups looking to crowd fund their business; and (iii) SecondMarket or SharesPost to find shares in later stage businesses, prior to their IPO (although valuations can be pretty rich).  And, don't forget to consider joining the angel investor networks in your town, like Hyde Park Angels, Cornerstone Angels, Heartland Angels and Wildcat Angels in Chicago, which do a good job of vetting quality startups for angel investors.

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