Real Estate, Trading Cards, Lego, Oh My!

By Geoff Schaefer

Geoff is a Wealth Advisor with Intergy Private Wealth. He writes for The Steadfast Fiduciary to help people live with an abundant heart, open mind, and boundless generosity.

August 29, 2023

In recent years, there has been a lot of talk about how traditional portfolio management is dead (it is in fact, not). That investors must use “alternative assets” in order to achieve financial success.  While these assets have a place in certain instances, there is a lot of confusion about what alternatives are and what they are not.  To help simplify a rather complex conversation, we’re going to use some examples everyone can understand, sports, toys, and houses.

In 2007, Lego produced a solid 14k gold minifigure of CP-30 and gave five of them away as a prize for a contest.  In 2008, one of these figures sold for $300,000 on eBay. Today, many regular Lego minifigures circulate the internet and collectible shops around the world where they sell for as low as $.50 and in some cases as high as hundreds or thousands of dollars.

Moving from the greatest toy of all time to the greatest football player of all time.  100 Tom Brady #144 rookie cards were released in 2000. Collectors could obtain them in a pack of cards costing $10 or so. One in mint condition recently fetched the ridiculous price of $3.1 million at auction.

Man, if we could have only been so lucky as to stumble upon one of those.

So, what does a Tom Brady rookie card and a Lego toy have to do with real estate?  All three represent an asset class known as alternatives.  Alternative Investments is a very broad category and includes: private equity (ownership of companies that do not have publicly traded stock), venture capital (investments in startups), art, collectibles, antiques, commodities (raw materials used to create goods like oil, wheat, corn, precious metals), and real estate.  Typically, any investments that does not fall within conventional investment categories are referred to as alternatives.  Conventional investments are publicly traded stocks, bonds, and cash (bank accounts, CDs, money market funds). Here’s what you should know about alternatives:

  1. They are not for everyone. While many of us own a house and probably a Lego set or two, it does not mean you are investing in that asset.  Your primary home can turn into an asset over time but definitely should not be viewed as an investment.  Not many people purchase their primary home, get their kid an action figure for Christmas or buys a pack of trading cards hoping to quickly cash out for a high return. You buy a home because you want a place that is your own, to be in a good school district and to be able to stay in a part of town where you can be close to your favorite activities. The getting rich off a primary house is not (and should not) be a major factor in home buying.  There is a very good chance your financial plan will play out just fine without ever dipping your toe in this asset class.
  2. They tend to perform differently than conventional asset classes. This is known as uncorrelated. In some alternatives, you will find a higher risk and return trade off. This means you face more possible outcomes both good and bad as you look out into the future, but you accept that because the possibility of the positive outcome is too lucrative.  There is a chance your cousin’s new company (an example of private equity) will be worth tens of millions in the future if sales take off and there is chance no one buys his organic beer and goat milk soap and the company (and all the money invested into it) is worth $0.    Stocks and bonds move the same way nearly 80% of the time.  With alternatives, you may see big ups when the stock market is down, or maybe no increase at all while stocks fly higher. Historically, alternatives move much differently than stocks and bonds and this could be a reason to consider adding them to a portfolio.
  3. They usually are illiquid and expensive. Think of when you sold your house.  There was a 6% commission for the realtor alone. If you had to tack on closing costs and taxes run it up way more.  Go back to collectible toys. There is not a huge immediate market for some of these collectibles.  You may be selling to a collector across the country or the globe.  You sell on a platform that charges a transaction fee then must ship and insure the package for delivery. All of these costs seem small but add up and eat into the return of your investment rather quickly. Many alternatives are offered to consumers in the form of funds. Maybe you have heard of hedge funds, private equity funds, derivatives funds, etc.  These can charge upwards of 3% annually (or higher) for the access and management of various alternatives.  Compare this to an index fund that holds the largest 500 companies in America that cost .03% per year. On top of the expenses, they are illiquid meaning, they do not convert to cash easily.  Go back to your home.  You list it, it’s on the market for two months, you add 30 days for closing and your asset took over three months to land in your bank account.  If you are selling collectibles, one may sit at an auction house for months or years before an acceptable bid arises.  From the fund standpoint, alternative asset funds can have months and even years of lockup periods.  That is not necessarily a bad thing, but as investors, we have to consider how easy or difficult it is to access our money.
  4. Alternatives have high minimums and difficult barriers to entry.  This doesn’t really matter as much for your card collection or collectible historic memorabilia, but matters quite a bit to your peer to peer lending, real estate, farmland, private equity (ownership of non-public companies), venture capital (investing in start-ups), etc.  These are usually managed at a fund level by a company that specializes in the specific investment type.  The cost are higher than other investments and typically large minimum investments are required.  For example, you may have to have $250,000 to dedicate toward a specific venture capital fund in order to invest.  This cuts many alternatives out of clients’ plans as those minimums represent too high a proportion of their overall net worth.  There is a lot of technology and new financial companies with the goal of making these alternatives more accessible.
  5. They should make up a minority portion of your portfolio.  Given the constraints around these asset classes, you want to limit your exposure to these asset classes.  The larger your net worth, the higher of a percentage you can allocate, but typically, having a portfolio of 100% alternatives is imprudent, expensive, and inefficient. As your net worth grows, this can and likely should be part of your portfolio, but there is a lot to be said for a simple portfolio of low costs funds that own stocks and bonds.

Alternatives can give you the potential for greater returns as compared to conventional investments.  They give you the opportunity to increase diversification and compliment conventional investments.  They also are opaque, expensive and illiquid.  For many investors out there, alternatives need not be part of their financial plan. Most Americans contributing to their 401(k) do not know what an alternative investment is and they will retire just fine never knowing.  My hope in sharing this is that next time you encounter an example of alternatives investments, that you understand the basic tradeoffs that exists. Alternative investments present opportunity, but they also present complexity.  Life is complex, and for as long as possible, we should keep our financial lives simple. If you and your kids enjoy Lego (like mine and I do), keep on playing, but don’t plan to get rich off it.

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