Investments 101: The Different Types of Investments — Where do you fit in?

Hey guys, so today I've got myself, Lincoln, here. We're gonna walk through what we call Investments 101, and we titled that this— we're essentially gonna walk through the different types of investments that are out there in general. This is good to understand where funds, alternative investments, fit into the whole landscape between bonds and stocks and equities and all this kind of stuff. Where do we fit into the whole landscape? Where do we fit in? What are your investors thinking when looking at alternative investments, especially in a new fund manager? How do they think about it? And I think this will give us a lot of insight.

If you've met with a financial advisor, they probably talked to you about some of these things before, right? Let's just start off at the bottom and work our way up. To start out, you have what you call the risk-free rate, and the risk-free rate is essentially a government bond, okay, that you're buying from the U.S. government. Why is it risk-free? Because the U.S. government is perceived as the safest investment that you can put your money that's like a guaranteed return.

Why?

Because the Federal Reserve can just print more money, and the, you know, the central banks, they just have an unlimited money supply. So if you invest in the risk-free rate, you're guaranteed to get that.

Backed by the faith of the US government right here.

That's right, that's right.

So what is the risk? What are we usually at? Now I know it varies, they've been changing this rate a lot, and depending on when you watch this video, it'll be different, but For today's purposes, what we're gonna say.

Yep. Let's put it at 1%, which is honestly crazy. Okay, because it's historically a lot higher than that. You look in the 1980s, is way higher than that. Like that is so low.

Our grandparents for retirement would go buy government bonds. Yeah, and live off that. It's 8%. They're gonna live off that for their retirement, and that was their plan. And now that's really not an option.

Yeah, you would have bought a 30-year government bond back in the 1970s or '80s at above 8%. If you got a guaranteed 8% right now, you would be like.

Wow, that's incredible. Backed by the US government. But now it's— yeah, it's down to 1%. Interest rates are low.

So the risk-free rate, that's kind of like the benchmark for everything else, okay? Above that, like if you're maybe a little more risky and you want a little higher return, I would say the next asset or investment is an asset-backed security or a mortgage-backed security because there's an asset, like a hard asset tied to its value. Now in the, you know, financial crisis, the The mortgage-backed securities, right, got out of hand because of subprime loans and the underwriters for those. And there's agencies that rate the safety of these vehicles, and honestly, it hasn't really changed much since the financial crisis. You'd think it would have changed more, but still, that's what we call kind of the next safest security.

So what returns are we looking at?

Yeah, we're gonna call that like 1% plus, anywhere from 1 to 3% depending on what type of, you know, investment it is. If it's first lien, On the mortgages, maybe it's packaged into a lot of things that makes it more risky, right? But that's kind of your second tier. So after that, you've got your corporate and muni bonds. Okay, corporate bonds are those are from companies. Okay, Apple issues a bond. You give them money today, and they'll give you money back in a next in the next couple years plus interest, right?

It's backed by the company.

Yep. And now Apple, for example, they're gonna have a very low rate on their bonds. Why? Because they're a great company. They're super safe. But if you get If you get a risky company, then it's going to be a lot higher than that. So I'm going to put anywhere from like above the risk-free rate, we're going to say like 1% to 10%. Because if you have a company that's like going bankrupt, that's a very risky investment. There's a chance that you invest with them and you don't get your money back.

Now, muni bonds, these are corporate bonds. What's those?

So that's issued from a state or a county or a city, whatever it is for projects like infrastructure or maybe like a rec center. The nice things about these is they're tax-free. So, I mean, you can measure everything on a before-tax and after-tax yield, but we won't get into that.

Okay, so after this, what's our next step?

There's more than this, right? There's like junk bonds, which are those higher bonds, and there's CDs.

You have a lot of categories here.

There's a lot, but these are kind of the, the main one, okay? Stocks/equity, okay? And this is when you're actually buying stake in the company, and so this is going to have higher returns because there's more risk in the event that there is a bankruptcy. Like, bonds are gonna get paid out before stocks, hence the return is lower on bonds than it is on stocks.

And the main stock that we get measured against for funds is usually the S&P 500. You have the Dow, the NASDAQ, but these main ETF stocks is what we— is the benchmark they call them for alternative fund managers. So we can put— maybe put down the S&P 500. Historically, we've seen about 10% return— that's pre-tax— on the S&P 500 over the last 30 or 50 years on that. You can Google that, all that stuff. So 10% for us is the benchmark to meet.

That's what everyone will measure your performance up against. If the S&P returns— maybe it's -4% on the year.

That's a bad year. Yeah.

What are you at? Are you above that? Because if you are, your investors are gonna be happy. If you're not, they're gonna be like, why am I putting my money with you?

You'll often hear, hey, did you beat the market last year? Or, or, we've beaten the market for the last 10 years. That's how fund managers will pitch investors. Hey, we constantly beat the S&P because of X, Y, and Z. We'll get that into just a second.

Yep, that's right. So everything here is like your public investments, okay? If you ever go sit down with a financial advisor, they might show you one of these circle charts, uh, that— and telling you about your asset allocation, okay? So they're gonna recommend that 55%, okay, if maybe if you're aggressive, is gonna go into stocks, and then 30% is gonna go into bonds, and then 15% is gonna go into alternatives. Okay? And the alternative space is where you're playing. That's where—

That's us.

That's the fund managers, right? This also includes like commodities or anything that's not a stock or bond, really. So when I was at JP Morgan, I only worked with people that had 9 and 10-figure balance sheets, right? So that's over $100 million. in liquid investments. Okay, so that doesn't count any sort of—

That's wild.

Yeah, I know, crazy. So a lot of them were billionaires, and what's 15% of a billion dollars?

$150 million allocated towards funds that they are going to give to alternatives.

Now of course they're not going to put everything into one fund, right? They're going to diversify these investments across a lot of different funds, but that is where we come into play, right? In the private market.

So on this list, the next tier above stocks is what we call alternative investments. You have private equity, you have hedge funds, real estate funds, forex funds, venture capital funds. All those together we call alternatives, and they are perceived as more risky than these other things. However, they have a higher potential for return.

It's a difficult space to compete in. All right, you go to Warren Buffett, you know, historically the The best investor of all time. You ask him, what do you invest in, Warren? What should I invest in as a maybe an uninformed investor? He'll say, go invest in the S&P 500. That's all you need to do. Why? Because anybody playing in this space thinks that they can outperform this guy. You know, they're saying that they're smarter than the S&P 500. They think they can realize excess returns. And it's true, some can, but a lot of them don't. So what's your edge, right? What are you doing that's going to beat this annualized return of 10%?

So you're here in the fund space, especially this, this space down here, is we are looking for alpha. When you're looking at your fund, your syndication deal, how can you find alpha inside of your investments? Alpha is your special sauce, is how you're gonna get high returns with relatively low risk. Most people think in linear terms: high risk, high reward. Low risk, low reward. However, us as fund managers, we think differently actually. With our funds, we perceive and we actually show investors, hey, we actually found this little niche of the market, this little corner of the market we can exploit because we have better management teams, we have better operations, we have better systems, better algorithms where it's not just dollars and cents, where we can put money in. It's actually relatively low risk, but we get actually a pretty high return for that risk. That's where we come in. That's why this alternative space has blown up. Over the last, I don't know, 3 decades, alternative funds have been on the rise and are still continuing on the rise right now and will be for the next 30 years, I believe, because of we have the ability to find alpha, especially with the internet, especially with management teams, with AI, all these algorithm things. We can come in and actively manage a portfolio and outperform the S&P 500.

So when you are pitching your investors, be sure to include as a fund manager how you are going to beat the S&P 500 and why they should give your money to you instead of that. When I've pitched investors before, that's a question I've gotten, and it should be a question in every pitch.

Now, to add to this, Lincoln, so this is kind of the, the basic rate we've seen. However, things in the last few years have been very interesting. About, uh, for me, about 18 months ago, I first learned about negative interest rates, which blew my mind. In Europe, I first learned about this, they had $8 trillion trading negative. Now, I think of today, it's about $17 trillion, with a T, trillion dollars that trades negatively. So for example, that's below, or I guess on this sheet above here, they're trading at -0.5%. Essentially what they're saying is they are guaranteeing a loss on their investments. $17 trillion, they're saying, hey, we've scoured the globe, we can't find anything better than a guaranteed loss on our investments. That's what's happening in the world. There is so much money out there that $17 trillion has flowed to negative interest rates To give you an example of, and you can do some more research, probably have other videos on negative interest rates. So my dad, you'll hear about him a lot in this program and course, has a partner, flew out to Denmark and met with a friend. This guy in Denmark has a mortgage, okay? A lot of people in America have a mortgage, and usually every month you pay money to the mortgage company. Well, his mortgage was at an adjustable rate, so it adjusted with the rates that the government had. His rates went negative. So now every month he goes, he's like, John, every month I get a check in the mail for $23 because I have a mortgage. Imagine your mortgage company paying you. See how backwards that is? This is the world of finance, and this is obviously a basic format. There is so much going on in the world right now. We have negative interest rates. You're getting paid on mortgages. What that tells me though, to summarize this, and you can go do it— I think negative interest rates are very interesting if you want to go on a, you know—

Hey, I can confirm it. I lived in Sweden for 2 years and I saw the same exact thing.

So it really is Yeah, the one thing that tells me though is people are looking for yield. There is money out there and people are looking for yield, looking for a return in some way, shape or form. That tells me first off, there's a lot of money out there and people are looking for yield and so why not launch a fund that can find and deliver them that yield?

And maybe I'll add one more thing on top of that. You say your benchmark is 10%, that 10% has a lot of volatility to it, okay? That means it could go down 30% in a year or up 30% in the following year. So maybe your fund, which is common in real estate, is just to have very consistent returns. So maybe even if you can offer like a very consistent 9% return to your investors, a lot of them are going to be very happy.

So for example, for my fund, I actually just raised money from an investor, okay? And my fund traditionally has done very well. We target our IRR as 25%, target all the way up to about 45% is usually the range we're in. Returns for the past 3 years. It's gone well, cross our fingers. I hope— I mean, I think it's going to keep going well. However, I met an investor and they— most of their portfolio, I asked them, where do you guys invest most of your money? It was right here, this realm. They said, we invest mostly in CDs. We're getting about 1, 2, maybe 3% a year. And I realized at that point, if I pitch this investor at a 25% IRR, I mean, that's— they're not even going to compute that that's possible, right? So guess what I did? I didn't pitch them that. I went in and said, hey, you know, we've got our investment. I want to pitch you. I know it's a little risk here, but I will pitch you an 8% fixed rate of return. And so what I did, I actually changed mid— I was mid-pitch with an investor. I said, hey, we're not looking for equity investors, we're looking for a debt investor, and I said, hey, give our fund a loan and I will guarantee you 8% return every year, and that's guaranteed by my fund, by myself, I'll personally guarantee it, and they were like, man, 8%, it's a little bit high, and it was a little bit stretch for them. They said, you know what, I think we're into that, and they signed 8%. Now, they could have been making 25, But that's a little bit out of the wheelhouse. And so, it just depends on where your investors are at, what they're used to. If they're used to negative interest rates and you pitch them 1%, that might be the best investment they've ever seen. But typically though, with all that being said, we could talk about this for an hour. Typically, the market, 10% S&P 500, is your standard. You're trying to beat the market with your fund and trying to find alpha where you can find asymmetrical risk of relatively low risk with high return.

So yeah, in case you didn't get a finance degree, there you go. You're covered.