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The Benefits of Alternative Investment Allocation in Uncertain Times

Post on: February 15, 2017 | Kyle Engelken | 0


Are your social media feeds clogged with angry political tirades? Perhaps you get a glimpse of a cute puppy or a friend’s child now and then, but that’s at best.

Let’s face it, we live in tumultuous times and there’s no shortage of opinions out there. When it comes to investing your hard earned money in today’s economic and political environment, there is a plethora of opinions to sift through. So, you guessed it, here’s another!

Famed statistician Nate Silver would encourage us to find the signal in the noise. I’m not suggesting we get up an hour earlier to pore through stock charts or watch another Jim Cramer rant on TV. I’m suggesting other avenues to build wealth should be considered beyond seemingly overpriced public equities and bonds yielding below 1% annually. Private placements that provide the opportunity to earn preferred returns of 8% to 10% annually on tangible real assets are a great way to introduce rational, transparent positions to your portfolio. According to WealthForge’s research, 2016 saw more than $1.3 trillion of investment in private capital markets. Much of this investment was in our backyards…literally. The shopping mall down the street, the new storage facility by our local airport, the wind farm built off the coast – even the newly refurbished 1977 Lotus we drooled over at an auction – are being financed through private placements offered to retail, accredited investors. In each case, investors are given the opportunity to diligence a specific project with tangible property, in a market he or she has a connection with and understands.

It’s no secret that since President Trump won the election, the Dow Jones has climbed more than 1,500 points to close at record highs above 20,000. Bond yields have followed suit with the 10-year note climbing over 100 basis points in two months. Investors have seen their retirement savings continue to climb—the question is, do market fundamentals support this growth and will it continue?

While public equity markets are at all-time highs, corporate earnings intended to support stock prices are not keeping pace. The Shiller Price to Earnings (P/E) ratio developed by Dr. Robert Shiller, economist, Yale professor, and author of Irrational Exuberance, paints a concerning picture for U.S. Equity markets. The Shiller P/E is a cyclically adjusted valuation metric defined as the price of the S&P 500 holdings divided by the average of ten years of earnings adjusted for inflation. Essentially the measure is an “apples to apples” valuation ratio that takes market cycles and inflation out of the picture so that investors can focus on long-term fundamentals. Many investors may not realize that today’s Shiller P/E ratio of 28.2 ranks in the 96th percentile and is about one point shy of two standard deviations above the historical mean of 16.7. This is from 136 years of data.

You may be saying to yourself, “Why should I care about this today?” Two words: subsequent returns. Economists, portfolio managers, and finance experts like us have looked at various levels of historical Shiller PE ratios and studied subsequent long-term average annual returns from the point of valuation. This research has indicated that Shiller P/E ratios above one standard deviation at 23 have corresponding ten-year average annual returns in the low single digits. For reference, below is a chart of the historical Shiller P/E ratio through January 30, 2017.1


When faced with the choice to deploy capital in public equities or find an alternative investment opportunity, investors should consider the rational facts before them. While it is true that public markets may be riskier than ever at the moment, choosing to invest in a private placement may require an investor to stomach illiquidity and exit market uncertainty (i.e. how will I get my principal back in the future?). Doing proper diligence on a private investment and taking the time to gain comfort around the offering structure, including the expected return profile, is supremely important. In the end, however, there is something to be said for considering alternative investment opportunities that display rational risk and return characteristics we can literally see, or in some cases like the ’77 Lotus, drive.

I’ll close with a quote by Professor Shiller himself. “Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others’ successes and partly through a gambler's excitement.”

Perhaps it’s time to consider an alternative investment allocation.


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Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice.

1 See http://www.multpl.com/shiller-pe/.

Disclaimer: Altigo provides this information for educational purposes only. It should not be construed or relied upon as legal or tax advice.

About author

Kyle Engelken

Kyle brings a deep understanding of portfolio management and private investments to WealthForge from his tenure at Cambridge Associates. Kyle received his bachelor's at University of Richmond and MBA from the College of William and Mary. Prior to joining WealthForge, Kyle managed a portfolio of microloans in Nicaragua for a US-based non-profit.
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