It might sound surprising, but one of the biggest challenges many investors face is social pressure from their community and circle of friends. It’s quite common for people to exhibit a compliance bias – when they behave and make decisions based on what others around them find acceptable. However, adapting your investment approach to be similar to that of your friends and family can be detrimental to achieving your financial goals, since everyone’s goals and financial situation are different.

In my experience, high net worth investors are the most likely to fall into the trap of compliance bias. A review of their portfolios quickly confirms this. Certain investments are more easily accessible to high net worth individuals. These opportunities seem exclusive, exotic, and usually require a high initial investment to be able to participate. They also make wonderful conversations at the country club, golf course, or other places that may attract an equally affluent clientele.

Unfortunately, many of these more interesting investments only make sense to certain investors and generally should not represent more than a small portion of a person’s overall portfolio. It is generally not a good idea to have your entire nest egg tied to these strategies. Below are some examples of these investments that can be found in the “country club portfolio”.

Private Equity (PE)

PE funds typically invest in companies that are not listed on a stock exchange. Some common examples are venture capital and debt buyout funds. Most private equity firms are exclusively open to high net worth investors.

While there is the potential for high returns, investors should be comfortable with separating their money for an extended period, sometimes between five and 10 years, while the strategy is being implemented. In addition to the lack of liquidity, investments may not work or lag significantly behind public markets.

Hedge funds

Hedge funds are actively managed pools of capital whose managers use a wide range of aggressive strategies to generate oversized returns. This can include using the borrowed money to make investments and trade more esoteric assets.

In recent years, hedge funds have been widely criticized for their high fees and poor returns relative to the broader market.

Real estate syndication

Real estate is a wonderful asset class that many investors are familiar with. One way to gain exposure to this sector of the market is through real estate syndication, where investors pool funds to purchase income-generating properties. The success of these types of deals depends on the location of the opportunity, the type of ownership, the management of the project, and the experience of the deal manager.

It is important for an investor to do their own due diligence on all of these factors to increase their chances of success.

Hard money loans

A hard money loan is money loaned by an individual or business instead of a bank. They are known as loans of last resort, often a short-term way to raise money quickly for people without traditional financing. As a result, returns are often much higher than those on loans through traditional channels.

Hard money loans are usually based on collateral rather than the financial condition of the applicant. Hence, a borrower default can always result in a profitable transaction for the lender through the collection of collateral. This method of financing involves a high level of risk.

Initial public offerings (IPO)

An IPO is the process of offering shares of a private company to the public through a new issue of shares. There is a lot of excitement when a popular company comes into the market, allowing investors to own shares of it. There is even more excitement among those who can buy the stock before the mainstream.

Unfortunately, all the exuberance creates a tendency to make bad decisions, such as buying a business without doing your due diligence, or making short-term transactions to try and make an immediate profit. These behaviors will not contribute to long term success.

If you are lucky enough to participate in an IPO, it is much more prudent to know what you own, why you own it, and to own the business for the long term.

Instead of a country club portfolio, get back to basics

When discussing the above strategies with friends, it’s common for people to focus on the sizzle and not the steak. Everyone will share the interesting features of these strategies and their exclusivity. However, few will share their overall success with all of their exotic strategies and how they compare to a simple portfolio of stocks, bonds and cash.

Some investors would do much better to focus on the proven methods below that determine their ultimate financial success.

Have a strong overall asset allocation

When investing, there is a temptation to get lost in the details of trading, stock selection and market timing. However, the reality is that exposure to different asset classes including stocks, bonds, real estate and cash is much more critical to returns than the aforementioned. In fact, a 1986 article by Gary P. Brinson, Randolph Hood and Gilbert L. Beebower titled “Determinants of Portfolio Performance” published in the Financial Analysts Journal concluded that asset allocation explained 93.6% of the variation. returns of a portfolio.

Getting the big picture right is the first step in designing a sensible portfolio, and that starts with proper asset allocation.

Watch your costs

In today’s world, US-based investors can gain exposure to investments anywhere in the world for a small fee. Using easily accessible exchange traded funds or low cost mutual funds is one of the best ways to get that global exposure. While some wealthy people may scoff at these pedestrian investments, the reality is that the high fees eat away at returns and will hamper their ability to achieve their goals.

An investor should think long and hard before paying a fund manager premium prices for an investment to which they can gain similar exposure for a nominal fee in a traditional investment vehicle.

Invest with taxes in mind

Taxes are another drag on the overall performance of its investments. Focusing on the location of certain investments, whether in a tax-deferred or taxable account, can be real money in the long run.

For example, tax inefficient investment strategies with lots of transactions, real estate investment trusts, or securities that pay ineligible dividends should be located in an IRA. This will lessen the tax liability of an investor. Conversely, tax-advantaged investments like index funds, growth stocks, and municipal bonds can be placed in a taxable account, as the tax burden is likely to be smaller.

The focus on the impact of taxes on yields should be a top priority to improve performance over time.

Know the difference between deep risk and shallow risk

Retired financial writer and physician Dr. William J. Bernstein describes the distinction between deep and superficial risk. The superficial risk is the loss of capital which is recovered in a few years, while the deep risk is the permanent loss of capital.

A good example of superficial risk is investing in the large US stock market. You may experience a short bear market, like what we saw in March 2020 when the S&P 500 fell about 34%, but eventually the US market will recover. Superficial risk can be expected to occur quite frequently, but it can be managed with proper planning techniques such as diversification, keeping sufficient liquidity at the margin, and maintaining a long-term strategy.

There may be high risk associated with some of the investments within a “country club portfolio”. This includes defaulting on a hard money loan or the bankruptcy of a start-up business shortly after an IPO. It can also happen if a real estate transaction fails or if a particular fund manager practices creative bookkeeping to artificially increase returns. In these scenarios, the investor may not recover any part of his investment capital and his loss will be permanent.

The above considerations will not generate the enthusiasm of a “country club portfolio”. However, conforming to the crowd is generally not the optimal way through life. When it comes to financial and investing planning, sticking to the basics and keeping it simple is almost always the best approach.

Disclaimer: This article is written by Jonathan Shenkman, Financial Advisor at Oppenheimer & Co. Inc. The information in this document is taken from sources believed to be reliable and does not claim to be a comprehensive analysis of market segments. discussed. The opinions expressed here are subject to change without notice. Oppenheimer & Co. Inc. does not provide legal or tax advice. The opinions expressed are not intended to be a forecast of future events, a guarantee of future results and investment advice. Investing in securities is speculative and involves risk. There can be no assurance that the investment objectives will be achieved or that an investment strategy will be successful. Investors should carefully consider the investment objectives, risks, costs and expenses of investing a fund before investing. This and other information, including a description of the different share classes and their different fee structures, is contained in a fund’s prospectus. You can obtain a prospectus from your financial professional. Please read the prospectus carefully before investing. # Adtrax: 3882001.1

Associate Director – Investments, Oppenheimer and Co. Inc.

Jonathan Shenkman is a financial advisor, portfolio manager and founder of the Shenkman Private Client Group of Oppenheimer & Co. Inc. He has experience in developing creative strategies that help his clients achieve their retirement goals. , inheritance and philanthropy.


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