Reasons to Invest in Diverse Funds

Just because stocks have a higher return than an unlevered bond index doesn't mean that an all stock portfolio is better. Arguing for a 100% stock portfolio is at best imprudent & self defeating and at worst significantly increases the risk savers have unacceptable outcomes. There is no reason to have to have an all stock portfolio to generate equity like returns. These academics just assume bond returns are lower than stocks. But that's not inherent to bonds, its because the bond index is a whole lot less volatile than stocks and because of that bonds structurally have lower excess returns. There are lots of ways that investors can *achieve the same returns as stocks* but have much better diversification. For instance, by using futures contracts or holding long-duration bonds to create bond exposure with similar volatility as stocks, then bonds investors can get returns that are of similar expected return vs. cash. Even a few simple steps can significantly improve diversification while keeping equity like returns (like the link below): https://lnkd.in/ep2hs8q4 There are even many easy ways to do this today that don't involve having to put the portfolio together yourself. Damien Bisserier's $RPAR and $UPAR offers investors *balanced* beta exposure at different levels of expected return. Corey Hoffstein's return stacking structures allow investors to get more cash efficient exposures. WisdomTree Asset Management's $GDE is an efficient way to access to gold and stocks. These are just many of the pieces investors can use to build high-returning, cash efficient portfolios. The reason why this diversification is so important is because *the path matters.* A lot. Savers don't just chuck money in their 401k or brokerage accounts and say bon voyage till retirement (as is assumed in the paper). Things change and changes draw on savings. People go to school, get married, they buy a car, house, have a baby, their kids go to school, etc. Savings is there for all those steps and since the timing isn't precisely known, the path matters. Imagine being a saver in 03 or 09 when stocks were down hugely and the savings you thought you had evaporated. The paper says wait it out, but that is often not realistic. Further there is a behavioral aspect. The paper just assumes that investors will 'ride out' any losses. Not care, not panic, not sell. But any advisor knows that's totally unrealistic. Its been well proven investors sell at bad times and buy at bad times too. An all stock portfolio fails to recognize these realities of human behavior. I'm all in favor of challenging the status quo but this is a step backward, not forward. The last thing we need is for investors to load up on stocks when they are at the highest levels relative to balance assets in decades. https://lnkd.in/e5YqjHcg

For most operators / executives who are interested in startup investing, it sometimes makes sense to invest in small funds to get started. A few key reasons: 1) Your odds of getting your money back are significantly higher. Venture is based on the power law so a few investments will drive the majority of returns. If you make just a few investments, your odds of going to zero and losing all your money are quite high. When you invest in a fund, you get a diversified portfolio that will average across 25+ investments and vintages over 2-3 years. 2) You have an opportunity to learn. Funds will provide written updates, generally quarterly, so you will be able to learn how full time investors are thinking about trends, valuations of companies, and investment trajectories. Many funds also build a community so you will be invited to events and have an opportunity to network. 3) Co-investment opportunities. Many funds will offer co-investment opportunities in companies so you can invest along side them. 4) Career opportunities. This is not a guarantee, but some funds might offer access to upcoming job opportunities within portfolio companies or advisory roles. At a minimum, you have a good chance to learn about up-and-coming companies and who’s doing well. Note, if you’re exclusively focused on keeping your cash accessible & getting decent returns, I always recommend investing in $VTI instead. Startup or fund investing (esp pre-seed / seed) should be used to diversify your assets & is a highly illiquid asset class.

I'm always surprised at how many investors do not know about or understand what a Fund of Funds is. It's quite simple. You invest into a 2-20 10 year close ended fund. That fund then invests in other 2-20 10 year close ended funds typically in VC, PE, RE etc. So, instead of making 20 separate allocations into each of those funds, you just make 1 allocation into 1 fund. "Yeah, but what about the double fees and carry?" True, you'll be paying fees and carry on the FOF level and then the FOF will be paying fees and carry on each of those funds that they're invested in, but... when you break down the numbers of a direct fund allocation and a FOF structure, the FOF typically comes out on top with better returns even with the additional fees and carry involved. Just like Angel investments into early stage companies, 90% will fail, but maybe 1 or 2 of those will be massively successful. With a FOF structure, they are spreading the risk out and getting access to a bigger pool of opportunities within each fund that they back. Most funds don't completely fail, but they may not perform to industry standards, and then you may have 1 or two funds that have huge wins within their portfolio that make up for the under performance of the other funds. Basically, a FOF allows investors to spread out their risk, have a bigger pool of potential "bets" and allows for diversification in different industries such as VC, PE, RE, Debt etc.