Many of our clients have worked hard to build portfolios worth millions of dollars, and they’re rightly proud of their achievements.
Most of them are content to stick with a tried-and-true approach: investing in a diversified, low-cost portfolio of leading global companies.
They understand that a steady and sensible approach to wealth management wins the race.
This strategy is far from boring—it’s a reliable way to grow and protect their wealth.
However, every so often, some clients become curious about exploring more ‘exciting’ investment opportunities…
These opportunities often come in the form of private equity, venture capital, pre-IPO stocks, or hedge funds.
It’s no surprise that wealthy individuals come across these options—private banks and brokers, keen for commissions, often pitch them as ‘exclusive’ opportunities with the promise of extraordinary returns.
But is the reality as glamorous as it sounds? Often, the real winners are those selling the investments, not those buying them.
Whether you’re investing $500,000 or $20 million, there’s a lot to be said for keeping things simple. While you might be tempted to take on some risk, it’s not always necessary or wise.
The drawbacks of ‘exciting’ investments
So, what’s the problem with chasing after these more glamorous investment opportunities?
On the surface, the potential returns from private funds might seem enticing—some people do see significant growth.
But let’s look at some of the reasons these investments might not be as exciting as they first appear:
1. Limited access to your money
These investments aren’t easily converted into cash when you need it. Unlike shares in large, global companies that you can sell when necessary, private equity and hedge funds can tie up your money for long periods—sometimes years. This lack of liquidity means you might not be able to access your funds in an emergency, or you’ll have to pay a hefty price to do so.
Plus, illiquid investments often make it difficult to assess their true value, leaving you in the dark about the actual worth of your assets.
2. Lack of diversification
Investing in the stock market allows you to spread your money across thousands of companies worldwide, providing a natural balance. If one company or country underperforms, others can offset those losses. This level of diversification means you don’t have to worry about the day-to-day fluctuations in the market.
In contrast, putting a large chunk of your wealth into a single company, a niche fund, or even gold is far riskier—there’s no safety net.
3. Reduced transparency
Public companies are required to disclose detailed financial information regularly, ensuring that investors have the data they need to make informed decisions.
In contrast, private companies operate with far less transparency. The information available is often sparse and can be difficult to interpret, making it challenging to assess the true risks and rewards.
There’s a reason these investments are often reserved for professional investors—they come with higher risks, and much can go wrong. Don’t give up your consumer protections by being classified as a ‘professional investor’ unless you truly understand what that entails.
4. High costs
Investing in globally diversified index funds or ETFs is typically low-cost. However, when you venture into private equity or pre-IPO markets, you’re often faced with steep fees—commissions can run as high as 5-6% or more.
These fees can create conflicts of interest, where the adviser’s recommendations might be influenced by their own financial gain. It’s telling how few of these ‘exciting’ opportunities are recommended when you’re working with a fee-only adviser.
5. Questionable value
When you buy shares in a company, you’re purchasing a stake in its future earnings. Similarly, bonds offer a promise of repayment with interest over time.
But with speculative investments like pre-IPO stocks or startups, the value is highly uncertain and often reliant on luck rather than sound business fundamentals.
If things don’t go as planned, you could find yourself holding a worthless asset.
6. Competing against experts
Investing is challenging enough in traditional markets. When you step into niche areas, you’re up against professionals who specialise in these sectors. These experts spend their careers analysing risks and opportunities, yet even they often struggle to outperform the market.
As an everyday investor, your chances of beating these professionals are slim, and the risks are much higher.
Understanding risk and reward
Not all the drawbacks mentioned above apply to every investment, but they do highlight the potential issues.
Many investors are drawn to alternative investments by the lure of higher returns. But it’s important to remember that higher returns come with higher risks and greater volatility. The historical performance of public investments, like those tracked by the MSCI World Index, is well-documented and offers a reliable benchmark. In contrast, returns from alternative investments are often less consistent and more unpredictable.
While private equity and venture capital have the potential for big wins, they also come with the risk of significant losses. These investments are often better suited to large institutions with the resources to absorb these risks—not individuals trying to secure their financial future.
Before diving into any of these investments, consider whether you really need to take on this additional risk. If you’ve already built a comfortable level of wealth, why gamble it on something uncertain?
A seasoned financial adviser can help you develop a strategy tailored to your needs, determining the return you need to achieve your financial goals without taking unnecessary risks.
We refer to this as finding ‘your number’—the amount of return needed to maintain your desired lifestyle without the fear of running out of money. With this number in mind, we can help you build a portfolio that’s designed to achieve your goals within your desired timeframe, such as before retirement.
The power of simplicity
The reality is, you don’t need complex investments to build or maintain wealth. A simple, low-cost, globally diversified portfolio of stocks and bonds is often the most effective strategy, and the evidence backs this up.
This approach is easier to manage, more predictable, and provides peace of mind knowing you’re investing in the global economy’s long-term growth.
There’s a reason why many wealthy individuals and institutional investors prefer simple, diversified portfolios.
And why Warren Buffet, one of the world’s most successful investors, recommends this approach.
It’s not because they don’t have access to more sophisticated options—it’s because they understand that the best way to achieve long-term financial success is to keep things simple and stick with what works.
