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Investment Gain Killers

Stock and crypto investors were riding high about this time last year. Flush with stimulus money, the Dow and Bitcoin markets were riding all-time highs.

On November 5, 2021, the Dow closed at 36,327.95, near its all-time high achieved early this year. On November 12, 2021, Bitcoin was also trading at its all-time high of $64,400. Since that heyday of last November, the stock and crypto markets have not been kind to investors. Since November of last year, Bitcoin is down 74%, and not counting the post-election bump, the Dow was down more than 22% right before the election.

Any investment gains made by stock and crypto investors in 2021 have been wiped out in short order in 2022. What happened?

The following chart offers a clue:

Inflation has been a big portfolio killer this year.

The Fed’s aggressive war on inflation has been a drag on the economy.

In September, the Fed raised rates another three-quarter of a percentage point. This was after the two prior successive three-quarters of a percentage increases in June and July. The Fed’s rate hike spree started with a modest quarter of a percentage hike in March, followed by another half-percentage hike in May. Since then, the Fed has been pulling out the big guns.

Have the Fed’s moves worked? Not so far. The needle hasn’t been moved in any meaningful way, with stagflation now being bandied around.

The economy is gripped by inflation and the fallout from the Fed’s moves to corral it. Inflation has been running near its highest levels since the early 1980s, and the Fed has been on a rampage to bring inflation down.

Inflation hasn’t been the only portfolio killer.

This year, the threat of recession, layoffs, sociopolitical turmoil, war, and gas prices have all weighed on stock and crypto markets. Economic turmoil has put investors in scarcity mode – with many liquidating for a rainy day.

It’s not just the everyday investor showing lack of confidence in the markets. This week, Michael Burry of “The Big Short” fame gave some insight into what he’s been up to lately.

Burry, whose bet against subprime mortgages was immortalized in the 2015 film, made a cryptic reference to new short positions on his Twitter account on Tuesday night.

“You have no idea how short I am,” Burry tweeted.  

The last time Burry went short was right before the market collapse of subprime mortgages in 2008, which launched the Financial Crisis. It sounds like Burry’s up to his old tricks, and this can’t be good news to investors as one of the leading talking heads in the financial world is expressing a lack of confidence in the markets.

Smart investors don’t put themselves in a position where they can lose more than 22% or 74% in a year or less. They shield themselves from the types of investment gain killers that plague the stock and crypto markets.

The problem with public markets like the stock and crypto markets is that they’re too liquid. Investors can too easily act on their impulses and run for the exits – dragging down everybody else’s portfolios with them. Hyperliquidity means that any and everything can kill your portfolio – whether it be investor sentiment, the media, consumer confidence, economic news, talking heads, social media, etc.

Smart investors take the valuation of their portfolios out of the hands of irrational factors – preferring to rely on economic fundamentals, numbers, facts, and figures. They defend against portfolio killers by avoiding the neighborhoods where the killers stalk their prey – meaning these savvy investors avoid the liquid public markets.

Smart ultra-wealthy investors neutralize portfolio killers by allocating away from the liquid public markets to the illiquid private markets, where they seek out certain classes of alternative assets that offer both passive income and growth.

In terms of private alternatives, smart investors gravitate towards assets like commercial real estate (CRE) and investments in private companies (i.e., private equity) that allow them to partner with experts to generate passive income and appreciation. By partnering with others, these investors can generate multiple streams of recession-resistant passive income through a variety of sectors as well as a variety of geographic sectors.

Private investments are not exclusive to the wealthy.

Qualified investors at all levels leverage private alternatives to insulate against portfolio killers.

Generating investment gains is one matter; keeping those gains is another. Smart investors have been leveraging CRE and private equity for years to generate gains and wealth insulated from factors that can come along and kill those gains.

In this volatile economic environment, maybe it’s time to consider protecting your portfolio with private alternatives.

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