Exiting The Stock Market Rollercoaster 

By Wealth Advisor - Lincoln West 

As a young child, I remember hearing and being shocked by the old tale of the Tortoise and the Hare. The hare was fast and confident, while the tortoise was slow and steady. In the end, the tortoise's steady approach won the race. This lesson stuck with me. I was caught in a turmoil of advice when selecting a place to work in order to further my career. I felt like I was being bombarded with numbers about performance, outlooks into the future and how they were going to navigate the market, and how the hot trends were going to help their clients ride up. After ignoring the fluff being thrown at me from other firms, I found that Legacy Wealth Management was not chasing the fads or the hot trends in a market based on skepticism, but was looking for security, steadiness, and lower standard deviations for its clients. This made me think and remember the lesson I had learned about the tortoise and the hare. This lesson helped shape my investment philosophy. 

When it comes to investing, many people are like the hare. They jump in and out of the stock market, trying to time the ups and downs. They chase after the latest hot stock or trend, hoping to make a quick profit. But this approach can be dangerous and often leads to disappointment, loss of principal, and stress levels shooting sky high. Short spikes and long falls through troubling markets have often not outpaced steady growth in the private market. 

This is why more and more investors are turning to the endowment model and investing like the institutions. The endowment model is a long-term investment strategy used by some of the world's largest institutional investors, such as university endowments and foundations. This approach emphasizes a diversified portfolio of alternative investments, including private equity, oil and gas, real estate, private credit/debt, and hedge funds. 

Institutions such as Harvard University, Yale University, and Brown University have been using the endowment model for decades and have seen significant success. These institutions have been able to achieve long-term growth and stable returns by investing in private markets. With their success being published, the endowment model has gained popularity in recent years, with more and more individual investors looking to replicate the success of institutional investors. Fortunately for our clients, there are now several ways for individual investors to access private investments without needing a million dollars or more deployable to one individual investment. As an RIA we can pool together clients’ funds to go towards these investments, allowing for lower minimums and better ease of access for those interested in exiting the rollercoaster that is the stock market. 

The first chart shows the returns gained in 2021 between the major university endowment funds vs the traditional stocks (60%) bonds (40%) portfolio. Below that, is the amount each portfolio proportionally had invested into alternative investments in approximated percentages. As you can see in the chart, the portfolios that incorporated alternative investments had better gains than the traditional 60-40 portfolio, which was invested purely in the public markets. 

Private investments have several advantages over traditional stock market investments. One of the most significant advantages is that market volatility does not affect private investments as much as it does publicly traded securities. Private investments are often held for anywhere between 1-10 years, which allows them to weather short-term market fluctuations. A disadvantage of private investments is a larger exposure to business risk and the success of the companies or projects you are investing in. 

Furthermore, private investments can have significant tax implications, which can help you save on your tax bill when it comes time to pay Uncle Sam. For example, some private investments, such as real estate partnerships, allow investors to take advantage of depreciation deductions that can offset taxable income. Additionally, some private investments offer tax advantages such as tax-free income, tax-deferred gains, or even tax credits. 

Investing in private markets requires commitment, patience, and discipline. However, the potential benefits can be significant. Over the long term, private investments have often outperformed public markets, and they provide investors with access to unique investment opportunities that are not available in the public markets. As seen in the second chart.

In conclusion, investing like an institution and following the endowment model can provide investors with significant benefits. Private investments offer diversification, stability, and tax advantages that are not available in the public markets. While the short-term spikes and falls of the stock market can be exciting, they can also be dangerous. That is why we believe in a partial exit of the stock market rollercoaster and consider private investments to be a key component to a long-term investment strategy. By following the tortoise's steady approach, we can achieve our investment goals and build long-term wealth.