“Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”– Warren Buffett
I’ve recently been watching Star Wars with my daughter.
In those movies, there is the good side and the dark side.
That concept reminded me a lot of Wall Street, which has a dark side.
Tony Robbins wrote a book where he found many misalignments of interest between Wall Street and you, the investor.
Wall Street finds a way to get paid even when you don’t.
Research proves this time and time again.
For example, this dynamic model suggests predatory traders involve themselves with less-able investors, leading to boom-bust dynamics.1
In my time as a registered investment advisor, I had my “Come to Jesus” moment.
When I saw what Wall Street was doing and the misalignment of interests, I couldn’t unsee it.
This is the case for alternative assets, or “real assets.”
Today, I’m going to get into why I love them and how they can help you avoid Wall Street’s dark side.
Let’s get into it!
1. Wall Street’s Flaws
Why do we call stocks and bonds traditional investing?
In 1974, the government signed a law called ERISA, which is the Employee Retirement Income Security Act.
Instead of having a defined benefit plan as a pension, you now have a defined contribution.
Up until then, companies used to pay a set amount into retirement funds.
Now, they maybe will put in a match, but the exact amount is mostly on the employee because the system relies on Wall Street.
Since then, stocks and bonds have become much more mainstream.
People used to think they were incredibly risky.
You don’t have to look further for an example than the stock market crash of 1929.
After that crash, the stock market went down 89%.
It didn’t recover for 25 years.
If a crash happened now in 2024, that means the market wouldn’t recover until 2059!
After the 1929 crash, people would rightfully stay away from stocks.
What was a flaw then is still a flaw now.
Wall Street has a misalignment of interests with its investors.
You could lose half of your portfolio and they would still get paid.
There’s a lot of hidden fees, like administrative fees and cash drag fees.
And they don’t even have to disclose those to you!
Tony Robbins says the average mutual fund is around 1.2% to 1.4%.
When you include all the hidden fees, it’s about 3.2%.
That’s pretty insane!
If you have a financial advisor, that’s an additional 1% to 2% on top of that.
If you ask your financial advisor, they’re probably not even aware of these fees.
Wall Street isn’t disclosing them to investors.
If you’re keeping track of the math, that’s about 4.2% to 5.2%.
That’s most of your returns in the stock market.
It’s truly a huge misalignment of interest.
Wall Street loves to deepen their pockets at your expense.
2. Benefits of Alternative Investments
Wall Street’s dark side really taught me about the benefits of alternative investing.
Instead of Wall Street, invest in Main Street.
Assets like multifamily syndication give you tax benefits, growth, and appreciation.
There are other deals that can do this, too!
Some of the deals I’m currently trying to get into have substantially higher returns as a whole.
Current research trends also sing the praises of alternative investments.
According to this article, they can provide:
1. Novel return patterns
2. An increase of diversification benefits
3. Improvement of risk-adjusted performance in long-term portfolios2
But make sure to be careful and pay attention when you diversify this way.
Alternative investments can also carry high risks on top of their high returns, especially in things like cryptocurrency.
According to this paper in the Journal of Student Research, that is why cryptocurrency is not considered a safe investment.3
3. Real-Life Example
Let’s go over a real-life example.
My friend Drew, who was a lawyer, realized he didn’t want to be a lawyer anymore.
He started doing small multifamily investing and eventually got into larger multifamily and syndication.
After a while, he replaced his lawyer income by investing in real estate!
Now, he loves what he does and he’s successful to boot.
There are a lot of ways to take this path, but to make a general conclusion:
I believe alternative assets are a stronger choice for long-term financial security.
There’s lower volatility.
You also get something called aligned interest.
Operators will typically put capital in with investors.
Often deal operators put in anywhere from 2% to 10% of the raised amount as the alignment of interest.
Syndication groups are even paid through split fees.
This model incentivizes a certain amount of profit for both sides.
That doesn’t really exist much in Wall Street, except for the hedge fund 2 and 20 structure.
When you invest in alternative assets, you are more likely to get better returns.
Now I want to hear from you!
What kinds of alternative assets are you interested in?
Let us know in the comments.
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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.
Works Cited
1. Maria Chaderina and R. Green. “Predators and Prey on Wall Street.” The Review of Asset Pricing Studies, 4 (2014): 1-38. https://doi.org/10.1093/RAPSTU/RAU003.
2. John M. Mulvey and Woo Chang Kim. “Role of Alternative Assets in Portfolio Construction.” (2014). https://doi.org/10.1002/9781118445112.STAT03737.
3. K. Vorobyev and Niklas Schmitz. “What are the Risks and Benefits of Alternative Assets?.” Journal of Student Research (2022). https://doi.org/10.47611/jsrhs.v11i1.2669.
