For the first time, the average investor can advance beyond “modern” portfolio theory and invest like a billion-dollar institution.
Virtually every major institutional investor (pension funds, university endowments, etc.) holds, on average, 25% of their multi-billion dollar portfolios in private alternatives.
Even as the stock market soared in 2017, private asset managers still raised a record $750 billion from institutional and ultrawealthy investors.1
Why? It’s pretty simple: the private market holds unique potential for better, and more consistent, returns. For anyone in the business of wealth creation (and preservation), it doesn’t get much better than that.
“Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management.”
- The Yale Endowment
Yet, if you’re like most investors, there’s a good chance that private market investing hasn’t even been on your radar. That’s because the doors to the world of private market investing have been essentially closed for individual investors — until now.
The flawed investing theory that’s all-too-popular
The good news is that most investors have finally accepted that it’s nearly impossible to beat the public market by picking stocks. So, instead, they’ve piled their nest eggs into index mutual funds and adopted some version of what’s been termed Modern Portfolio Theory.
Modern Portfolio Theory, first introduced over 60 years ago, generally advises that you should buy corporate stocks and “own your age” in bonds. So if you’re 30-years old, you should build a portfolio that’s a 70/30 mixture of stocks and bonds.
“It is a terrible mistake for investors with long-term horizons . . . to measure their investment ‘risk’ by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.”
- Warren Buffett
The idea of aiming for growth early, and stability later on, has a lot of merit. But the perhaps poorly-named “Modern” Portfolio Theory has a couple of major flaws in today’s world:
- It doesn’t create adequate diversification: A mixture of stocks and bonds is supposed to give you diversification, protecting your downside from major market swings. The problem is that these two asset types are more closely correlated with the total public market than ever. With notoriously low historical returns, bonds were at least supposed to zig when the stock market zags — that’s no longer a guarantee.
- It doesn’t consider options beyond the public market: Modern Portfolio Theory is built on the assumption that average investors may only be able to invest in the public market.
To be fair, for a long time, it was true that the average investor could only really access the public market. It wasn’t until 2012 that a slew of technological innovations and shifting financial regulations unlocked the world of private market investing for everyone, regardless of net worth.
So, in a time when most bonds are projecting a 0-2% return over the next 20 years, it’s time to seriously reconsider what’s now an outdated investment strategy.
Introducing: Modern Portfolio Theory 2.0
Allow us to present two guiding principles for what we’re calling Modern Portfolio Theory 2.0:
- Buy things that zig when the rest of your portfolio zags: In order for a portfolio to be truly diversified, its investments must be allocated across several different uncorrelated asset types.
- Use time to your advantage: Rather than only rebalancing your portfolio based on risk tolerance over time, you should also allocate based on liquidity needs. If you don’t need instant access to some portion of your money today, use longer-term investments to create higher return potential.
To build a portfolio that achieves these two principles, you have to find a way to expand your portfolio beyond the stock market (and the public market at large). In the past, this has often meant buying a home, or becoming a landlord, via the private real estate market.
For a long time, the private real estate market has been a favorite hunting ground for the elite investor. Its unique potential for high returns, consistent passive income, and built-in tax advantages are drool-inducing attractions. But it’s also accompanied by some very real complications.
For instance, private real estate investing has traditionally required you to write a really big check for a single asset. This may give your portfolio a lot of upside, but it’s also putting a lot of eggs in one basket. A random hailstorm, or a string of terrible tenants, can cause irreparable damage to the value of your portfolio.
But now, for the first time ever, you can invest in multiple million dollar real estate deals without writing million dollar checks.
The future of [real estate] investing
We started Fundrise because we knew firsthand that there was a better way to invest, but that it was out of reach for the vast majority of investors. So we embarked on a mission to democratize access to private real estate investing. Thanks to changes in regulations and our own technological innovations, we’ve been able to do just that for hundreds of thousands of users.
Fundrise is the first simple, low-cost real estate investment platform. Now, whether you’re starting with $500 or $5 million, you can unlock a world of private market investing that was previously only available to those billion-dollar institutions.
With Fundrise, you can invest your money, according to your goals, in a portfolio filled with dozens of real estate projects — each one strategically handpicked, actively improved, and carefully managed over time by our team of real estate experts. That means instant diversification and the potential for higher performance, which in turn could power the growth of your net worth.
If you’re ready to join the world of billion-dollar institutions in advancing beyond 1950s-style investing, then it’s time to start building a more perfect portfolio with Fundrise.