Exciting Opportunities for Bad Returns
Last week, I sent out a video and some slides focused on the idea that there are no free lunches in the investment world. Strategies that promise to provide outsized returns at lower levels of volatility are likely overstating the opportunity or understating the risk.
That is why I get a little worried when I see articles like these:
From the Economist: The risky world of private assets opens up to retail investors: Fund managers smell an opportunity to get even bigger.
From Advisor Hub: Empower 401(k)s Will Offer Private Assets in Plans With Help From Apollo, Franklin
First, as I wrote earlier this year, private investments today are not what they used to be. And second, we’ve seen this before.
For example, here is an article published in 2014 titled The Ghost of Private Placements Past.
While broker-dealers were making record commissions off non-traded REITs, the article’s author prophetically wondered if these companies had learned their lesson after earlier private placements they sold collapsed in the wake of the financial crisis.
In hindsight, we know they had not learned from their mistakes. Most of these REITs collapsed shortly after the article was published, and the broker-dealers were again surprised by the fallout.
Learning the Correct Lessons
When it comes to marketing investments, there is always a new angle, a new pitch, a new way for businesses to profit from new groups of people eager to make money.
But as we watch the sales and marketing of private placements continue to ramp up, I’m forced to wonder if any of these firms or investors have learned the right lessons from the industry’s earlier mistakes.
Only time will tell, but I suspect they have not.
A Note On Option-Based Strategies
I have previously written about buffered funds and defined outcome ETFs (funds that can go up a certain amount without going lower than a preset limit) and explained why they will underperform over time.
However, Cliff Asness and Dan Villalon wrote a more technical article, Buffer Madness, to explain why funds using option strategies to limit risk consistently underperform similar portfolios that use cash as a buffer. To quote the article:
By and large, options-based strategies have not been effective tools to achieve better risk/return outcomes. And this is unlikely some fluke of the past five years. Economic theory would argue investors should have expected this result, and that they should going forward, too.
And for those who make the case that these products are necessary to protect investors from themselves, I’d direct you to the final paragraph:
For the buffered industry to grow, it seems its proponents are banking on the placebo effect as opposed to the actual efficacy of their products. Don't get me wrong; panic selling is generally bad. But charging investors for a product worse than a simpler alternative isn't a good way to treat it.
I agree. When it comes to investing and most things in life, simple is generally better than complex.
Personal note:
This week, my wife and I celebrated our 14th wedding anniversary.
Being married to the love of my life is the greatest thing that has ever happened to me.
When it comes to writing about investments, the disclaimers are important. Past performance is not indicative of future returns, my opinions are not necessarily those of TSA Wealth Management, an SEC-registered investment advisor, and this is not intended to be personalized legal, accounting, or tax advice etc.
For additional disclaimers associated with TSA Wealth Management please visit https://tsawm.com/disclosure or find TSA Wealth Management's Form CRS at https://adviserinfo.sec.gov/firm/summary/323123