An Alternative View of Accumulating Wealth

I know it’s 2024, four years after the shutdowns sent our economy into shock. But it’s just as clear we’re still seeing the consequences play out today.

According to the U.S. government’s pandemic oversight website, “More than 476 million payments totaling $814 billion in financial relief went to households impacted by the pandemic.”

That’s a lot of money anyway you look at it.

Much of it was spent on necessities, as intended, such as housing, food, and childcare. A lot went to businesses to make up gaps in payroll. However, significant chunks also went toward buying up discretionary goods, causing a major bull market in the collectables space.

Stamps. Art. Coins. They all rallied right alongside the non-fungible token (NFT) market, and many areas of the real estate market.

Moreover, the resulting gains inspired even more interest in these types of investments. So did the accurate assessment that some of these alternative investments can potentially diversify portfolios.

For proof of increased interest, look all the way up the food chain to Blackstone (BX), the world’s largest publicly traded alternative asset manager. It’s seen average inflows of $51 billion per quarter during the last two years. It recently became the first alternative asset manager to reach the historic level of $1 trillion in assets under management.

Investors can make money – sometimes lots of it – in collectibles, it’s true. But that tends to be isolated to specific speculative periods and only a handful of people end up big winners. And if the investment doesn’t generate income, buyer beware. Regular cash payments never go out of style, but baseball and Pokémon cards do.

So before you invest in any category, alternative or otherwise, know the potential risks and rewards.

Is the 60/40 Portfolio Dying?  

The 60/40 might be the old way of doing things, but that doesn’t necessarily mean it’s out of touch.

According to Morgan Stanley Investment Management, 2022 that was the worst year for the standard 60/40 portfolio since 1937 and the fourth worst in the last 200 years.

For decades, retirees especially were (and still are) advised to hold 60% equities and 40% bonds. The larger allocation is supposed to provide long-term growth while the bonds offer a hedge against negative market volatility.

This makes sense considering how bond prices tend to rise when stock prices fall as investors seek safety. But that didn’t happen in 2022.

Both stocks and bonds went down, resulting in a -17.5% result for the 60/40 portfolio. In fact, bonds were one of the worst performing asset classes. That’s why it was so common to see headlines asking if the traditional allocation was dead.  

One year’s data matters, but it doesn’t guarantee a new trend.

To quote the Morgan Stanley report further, “Two hundred years of historical analysis suggests there is an 80% probability of positive returns in the two years following a year of negative returns for both stocks and bonds.” And more recently, Ameriprise Financial published a report titled, “The 60/40 Portfolio Is Not Obsolete.”

It showed just how bad 2022 was for the 60/40 portfolio… and how quickly it bounced back.

A 9.3% average yearly return is well above inflation and is reasonable for most investors given it has a heavy allocation to low-returning bonds. So we don’t expect to see the 60/40 portfolio go away completely anytime soon.

These years do demonstrate the potential value of having a portion of the 60/40 portfolio allocated to alternative investments. While trading cards and classic cars don’t have much of a track record outside of speculative periods, other alternative investments do. Like the kind Blackstone and its peers manage: private equity, private credit, and real estate.

It's no coincidence that these alternative asset classes solve real-world problems. Private equity helps companies get started and expand. Private credit fills the void left by our restrictive and heavily regulated banking system. Real estate is needed so people have a place to live and companies to operate.

Collectibles don’t solve any business problems, so their value is inherently speculative.

Fears of Inflation Driving Alternative Asset Demand

Two years down the road, it’s clear that 2022’s unusual performance was due to unusual factors. That includes record deficit spending by all levels of government, the resulting high inflation, and massive disruption in supply chains.

Take residential real estate and farmland. Both have seen their values soar in recent years, with the ultra-rich especially turning to fertile farmland as a store of wealth.  

A 2023 Nasdaq article highlighted its importance as an inflation hedge, stating:

“… according to the NCREIF Farmland Index, the value of U.S. farmland owned by investors rose 10.2% in 2022, while the average inflation rate was 8%. As inflation rises, farmland values tend to rise as well in almost a directly correlated fashion.”

It’s no wonder then that Bill Gates made headlines in 2020 by becoming the largest individual owner of private farmland. According to CNBC, he acquired more than 269,000 acres across 18 U.S. states in less than a decade. The amount of high-quality farmland globally is more or less fixed. And no matter what happens with artificial intelligence or bitcoin, people and animals need to eat.

Meanwhile, a report by the St. Louis Federal Reserve board shows a significant upward trend of residential real estate prices.

Past recessions are shaded in gray on the 50-year chart above. In which case, you can see that the median price of U.S. home sales held up fairly well through many an economic slowdown. That’s because these assets continued providing a valuable service to society, and their cash flows (rent) held up as a result.

Investing or Emotional Attachment?

Consider the numbers in this list:

• A 1952 Topps Mickey Mantle card sold for $12.6 million in 2022, setting an all-time record for sports memorabilia.  

• After the Last Dance docuseries captured America’s attention in 2020, one of Michael Jordan’s NBA Finals Bulls series sold for $10.1 million.  

• A rare Pokemon card sold for more than $5.2 million in 2022.  

• A gem-mint 10 grated Black Lotus sold for $3 million, setting a new all-time high for a Magic the Gathering card in May 2024.

In a recent article published by University of Virginia’s well-respected Darden Report, Rodney Sullivan – executive director of the school’s Richard A. Mayo Center for Asset Management – said, “I view collectibles as a psychological investment in the sense that you get psychological benefits from owning it.”

That emotional connection is part of the reason why these assets can become ever-more valuable over time. But they are also vulnerable to huge swings in value.

How do you evaluate that lists’ long-term value? A trading card, for instance, doesn’t generate earnings; you can’t perform a discounted cash flow analysis of it.

It’s worth something because of its scarcity in a relatively small circle of collectors. If that circle dwindles in number or enthusiasm, the card’s worth falls too. Since collectibles are generally closely linked to one or two generations, many have a clock that eventually runs out of time.

Do you know many young people today that are interested in 1960s muscle cars? Many don’t even want drivers’ licenses. When the generation that grew up with those cars is no longer around, the fate of that collectibles market is uncertain.

Never Lose Sight of Cash Flows

There are pros and cons to every investment sector and style. But some are more difficult to evaluate than others.

That’s why, in the world of alternative assets, real estate in particular has historically maintained staying power. Because it can provide rental income as well as price appreciation, it’s less speculative than “assets” like trading cards that are 100% dependent on someone else paying more down the road to generate an economic return. Real estate has been a core aspect of every civilization going back to at least ancient Rome.

Income-producing properties or publicly traded real estate investment trusts (REITs) can provide tactical diversification and are a potential inflation hedge. That doesn’t guarantee that’ll occur in the future, but the same drivers (increasing replacement cost, growing urbanization, and long-term economic growth) are in place.

Real estate benefits by having practical and psychological benefits. Real estate investors can easily calculate the distributions, or amount of income produced from a property relative to the amount invested, before purchasing them, which helps them better assess potential risks and rewards. Psychologically, people love knowing they own “a piece” of a building they can see and visit, even if it’s in another state or country. It's still “theirs.”

We understand that Babe Ruth isn’t signing any more autographs.

Picaso isn’t painting any more masterpieces.

And they aren’t printing any more boxes of the original Pokemon set.

Some of these will probably continue to increase in value as long as governments keep printing money.  

But the fact is that no one’s making new land either, a resource that appeals to a much greater crowd for far more reasons. Reasons that have lasted throughout the millennia – which is more than most other alternative assets can claim.

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Nothing in this blog is or should be construed as investment advice or an offer or solicitation of offers of investments. Both Real Estate Investments and Securities offerings are speculative and involve substantial risks. Risks include but are not limited to illiquidity, lack of diversification, complete loss of capital, default risk, and capital call risk. Investments may not achieve their objectives. Investors who cannot afford to lose their entire investment should not invest in such offerings. Consult with your legal and investment professionals prior to making any investment decisions. All Securities are offered through North Capital Private Securities, Member FINRA/SIPC.