By Justin May, Portfolio Manager
Lately, more and more money has been flowing into private investments, with everyday people joining in on opportunities once reserved for institutions and insiders. The pitch is hard to resist: access to exclusive deals, the potential of higher returns, and the feeling of playing in the “big leagues”.
Beneath that promise lies a web of rules, restrictions, and jargon that few understand. These fine-print details are exactly why private investments aren’t a fit for most investors, especially without the guidance of an advisor.
Still, many private investment companies have made it easy for everyday people to buy in. The result can be disappointing for less experienced investors. I’ll let investor complaints about one private sponsor, Fundrise, illustrate why you should only make these investments with guidance, experience or both.
Lack of Liquidity
Investments in private funds aren’t liquid like stocks, mutual funds, or ETFs, which can be redeemed for cash within a day. You’re lucky if you can redeem your private investments for cash 4 times a year. And in most cases, you’ll pay a penalty if you redeem your investment before a holding period measured in years. Don’t treat your private investment as a savings account like ‘local guide’ Andrew.
Infrequent Valuations
The price of a stock is determined by its most recent sale price, and those trades happen many times daily. Because private investments aren’t traded frequently, often their value is determined by an appraisal every month or quarter. Investors wanting to sell their investment may be in for a nasty surprise when they find out the value of those shares has dropped only after they’ve been sold.
Low Correlation with Public Markets
Index funds make it easy to invest in thousands of companies all over the globe. If you invest broadly, you can expect market-like returns, and your returns will correlate with the overall economy. Private investments are typically not so diversified: a fund may hold a few hundred, or in many cases only dozens of underlying investments. There’s no telling how a few investments will perform compared to thousands, so there’s a chance your private investment may drop while the indices rise.
Private investments can add value to a portfolio, but only when investors know what they’re signing up for. Illiquidity, infrequent valuations, and limited transparency aren’t flaws, but rather part of the design. For some, those features provide diversification and stability. For others, they become sources of stress, regret, and negative reviews. In the end, private investments aren’t for everyone—and if you do choose to explore them, it’s worth having a trusted advisor by your side.
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