Exploring Alternative Investments and Building a Long Term Vision - Replay

My name is Brian Scribonia and on this episode of the Common Sense Financial Podcast, I feel that the world has changed quite a bit since 1990. The baby boomer generations were the biggest savers in the 90s during a time of incredible growth in the public markets, and are now the same group of people who are retiring and withdrawing from the markets. And we have medical advancements that seem to be keeping people alive longer, but they are not necessarily healthier, placing a lot of pressure on investor assets to provide income longer and support increasing medical expenses.

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Opportunities are still there. The attempt at passing down wealth from generation to generation. Consider the outcome, not just popular opinion, and the whole teaching there is about preparedness and being ready. There's a difference between what's real and what's true. You're listening to the Common Sense Financial Podcast. I'm your host, Brian Scribonian. Thanks for tuning in and let's get into today's topic. Recognizing the shift in investment philosophy amongst the largest investors is something to pay attention to, as it could offer valuable insights into how to position your retirement assets. The 2000s was a decade to remember with the tech bubble, terrorist attacks and mortgage crisis, and during this time I was interested to know what larger investors were doing to help diversify away from some of the public market risks in an effort to help clients protect downside risks. And what I learned was that endowment funds were reducing their exposure to public markets while they were increasing their private investment holdings. And at the time, alternative investments were mostly reserved for the more fluent investor. But as interest in alternatives has increased over the last 20 years, so has their availability. In my June 2020 Kipledger article, to Succeed at Investing, do what Yale Does, I highlighted that the wealthiest and most successful investors in the world like a Yale Endowment, they keep getting wealthier not because they are lucky or privileged, but because they are playing a different game than the average investor and my take on this hasn't changed all that much. As endowments and pension funds face a unique challenge compared to individual invest investors see, unlike individuals with a finite lifespan and spending need, endowments and pension funds are perpetual entities. This necessitates a long term investment approach that prioritizes growth while managing risk and generating income. This approach can be a huge opportunity for retirees to adopt as we see medical advancements accelerating that could extend life beyond what we have seen in the past. I believe we are entering into a longevity dilemma as people may find themselves living longer than their assets. And with this possibility, I do believe it's prudent for investors to adopt an endowment model. The traditional retirement age tied to Social Security eligibility has longevity implications that I believe are being overlooked. For instance, if a person works for 40 years, then retires and lives another 40 years, there's a lot of pressure on those first 40 years to save and invest enough money. And once that transition of retirement occurs, there's even more pressure to cash flow the retirement with that savings to include inflation and market volatility over those 40 years. In my episode 52 of the Common Sense Financial podcast, strategically separating your assets with the five minute retirement plan, I touched on the 4% rule, which was an idea birthed by William Benjin in 1994 who based his data on a period between 1926 and 1976 using a 6040 model. It is a common theory used within the investment community. But what's interesting is that many endowments and pension funds are not following this theory. In fact, we find that they will move an estimated $325 billion out of the markets in 2024 after already moving 191 billion in 2023. And this movement of billions of dollars reflects a movement to diversify and capture returns beyond traditional publicly traded equities. It also signifies, in my mind, a departure from the traditional 4% rule amongst individual investors. Now, if you're not familiar, the 4% rule suggests you can safely withdraw 4% of your retirement savings annually with the assumption that the balance in your account will sustain you for 30 years, at which time you theoretically run out of money. And while this approach offers back testing from 1926 to 1976, it theoretically leaves you in a pickle if you live beyond this time frame. And the largest investors, such as the endowments and pension funds, have for years been shifting their assets, seeking to mitigate risk and generate higher returns while the average investor continues down the same rabbit trail, hoping for everything to work out. Now, to be clear, there's risk with any type of investment and alternatives are no exception. Which is why expanding the definition of diversification and in my opinion is needed. As with any diversified portfolio, there's an ongoing effort to find non correlating asset classes. And with the stock market becoming more and more correlated in terms of how investors behave with a 24,7 news cycle, the alternative space becomes more attractive because it offers something different. It's an alternative. Now, I don't have a crystal ball, of course, regarding how public markets or private markets will perform in the future. No one does. But what we can look at is the shifts occurring in real time and choose to be proactive to do something about it. I feel that the world has changed quite a bit since 1990. The baby boomer generations were the biggest savers in the 90s during a time of incredible growth in the public markets, and are now the same group of people who are retiring and withdrawing from the markets. And we have medical advancements that seem to be keeping people alive longer, but they are not necessarily healthier, placing a lot of pressure on investor assets to provide income longer and support increasing medical expenses. According to the National Multifamily housing council, the US needs to build 4.3 million more apartments by 2035 to meet the demand for housing, which could be an opportunity for investing in the space and supply chain issues and distribution networks have created a shortage of industrial buildings and is yet another opportunity opportunity for investment. Now, inflation is another issue to pay attention to. It's the result of too much government spending, which not only the cost of goods for us as consumers, but it also puts markets at risk. A recent article by John Cochran of National affairs suggests that serious inflation is often followed by serious economic difficulties because inflation is a form of sovereign default. And sovereign default happens not in boom times, but when economies and governments are in trouble. Now, this is not an exhaustive list of things that I see changing, but does underscore the reality that there are many things that are happening globally that have the potential to influence market behavior. And while there is not much we can do to change these things, we should be paying attention to the potential impact these things could have on markets. Now, as we already mentioned, some of the largest investors are looking outside of public markets to find opportunities and private markets. Now, if you're not familiar with private markets or these alternative investments that I'm referencing, let me just shed some light. You are most likely familiar with the stock market, which is public and has trading hours. But there is an alternative to this, as the name implies and is facilitated within private transactions. You have likely heard terms like private equity, private debt, real estate, trust, and maybe oil and gas, to name a few. These are just examples of what alternative investments could be. These investments have buyers and sellers and it's bought and sold outside of public markets. Now, of course, I'm oversimplifying this, but my goal is not to make you an expert, rather to help you understand the differences. Now, it is worth mentioning that there are institutional investments that take these private market assets and they package them up into holding companies that then are publicly traded on the stock market. And while the underlying assets may be considered alternatives, they're not private and there is a difference. Another thing I will mention here is that though they are not technically private markets, annuities and specially designed life insurance contracts are alternatives of the stock market and are commonly used as yet another form of diversification. Remember that for many people the stock market may be a core component of a portfolio, but it cannot be the only holding. So I'm not suggesting getting out of the market entirely, but I am pointing out that there are other investment opportunities available to you that could help you invest more, like the endowments. The bottom line is that we are seeing the world change before our eyes with new technologies like artificial intelligence. All the geopolitical events that are happening and other things already mentioned here, and the way we invest today needs to be forward looking to consider the changes that are underway. We cannot look in the rearview mirror focusing on just probability of past performance because the world we live in is not the same and will most likely not be the same in the future. I already referenced the 4% rule as a theory from 1994. There's also the 6040 portfolio that was developed in 1961 and is rooted in a 1950 development called Modern portfolio theory. Now there are definitely fundamental things within modern portfolio theory relating to diversification that still rings true today. But there are a multitude of new investment opportunities today that didn't exist in 1961. I will leave you with this. If your portfolio is compiled mostly of a basket of publicly traded investments and you are an accredited investor, it may be well worth your time to re examine how you approach diversifying your portfolio. There is a new landscape of opportunities that has traditionally been reserved for institutions. But as the popularity of private markets has increased, the availability of these investments have also increased, making them more readily available. Unfortunately, many financial firms only operate within public markets. But there are smaller firms like mine that have the resources and experience to help you with these other opportunities. You can visit scriboniofinancialgroup.com to learn more. That concludes today's Podcast I am Brian Scribonia thank you for listening to the Common Sense Financial Podcast.

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Thanks for listening to today's show. If you liked what you heard, be sure to subscribe on YouTube and Spotify so that you can receive notifications when we release new episodes. I'm Brian Scribonia and this is the Common Sense Financial Podcast.

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Securities offered only by duly registered individuals through Madison Avenue securities, llc, Member FINRA and SIPC Advisory services offered only by dually registered individuals through Scribonia Wealth Management, a registered investment advisor. Tax Services offered only through Scribonia Tax Consulting MASS does not offer build banking or tax advice. Scribonia Financial Group LLC Scribonia Wealth Management LLC Scribonia Insurance Services, llc, Scribonia Tax Consulting and Build Banking are not affiliated with mas. Scribonia Wealth Management LLC is a registered investment advisor. Advisory services are all only offered to clients and prospective clients where Scribonia Wealth Management LLC and its representatives are properly licensed or exempt from licensure. Investing involves risk including the potential loss of principal, any references to protection, safety or lifetime income. Generally referred to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying ability of the issuing carrier. This podcast is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual situation. Build Banking is a DBA of Scribonia Insurance Services, llc. Benefits and guarantees are based on the claims paying ability of the insurance company not FDIC insured results may vary. Any descriptions involving life insurance policies and its use as an alternative form of financing or risk management techniques are provided for illustration purposes only, will not apply in all situations, may not be fully indicative of any present or future investments and may be changed at the discretion of the insurance carrier, general partner, and or manager and are not intended to reflect guarantees on securities performance. The term Build banking, private banking alternatives or specially designed life insurance contracts are not meant to insinuate that the issuer is creating a real bank for its clients are communicating that life insurance companies are the same as traditional banking institutions. This material is educational in nature and should not be deemed as a solicitation of any specific product or service. Build Banking is offered by Scribonia Insurance Services, LLC only and is not offered by Madison Avenue securities, llc. Our firm is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the US Government or any governmental agency. The information and opinions contained herein provide provided by the third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by our firm. References to Build Banking, private banking alternatives, or specially designed life insurance contracts are not meant to insinuate that the issuer is creating a real bank for its clients or communicating that life insurance companies are the same as traditional banking institutions. This material is informational in nature and should not be deemed as a solicitation of any specific product or service. Build Banking is not FDIC insured. Build banking is offered by Scribonia Insurance Services, LLC only and is not offered by Madison Avenue Securities, LLC nor Scribonia Wealth Management, llc.

Alternative investments may be subject to less regulation than other types of pooled investment vehicles. Alternative investments may impose significant fees, including incentive fees, that are based upon a percentage of the realized and unrealized gains, and an individual's net returns may differ significantly from actual returns. Such fees may offset all or a significant portion of such alternative investments. Trading Profits Incorporating alternative investments into a portfolio presents the opportunity for significant losses, including in some cases, losses which exceed the principal amount invested. Also, some alternative investments have experienced periods of extreme volatility and in general are not suitable for all investors. Asset allocation and diversification strategies do not ensure profit or protect against loss in declining markets. Endowment funds are managed for institutions, not individuals. An endowment like strategy is not an endowment or an endowment fund.