To the Alto Community,
Like many of you, I’ve been thinking about what we’ve witnessed in the public markets over the past couple of weeks, and I promise not to rehash all that’s already been written. Suffice to say that Wall Street is not always the villain it’s made out to be any more than Main Street always needs protecting. Our public market system has structural flaws—it always has—and while the flaws have been visible to some, they are now magnified for all to see.
But to be clear, this tectonic shift has been building for decades. In February 2001—20 years ago— a New York Times article by Michael Lewis highlighted not the new new thing, but rather the same old thing: if market participants can manipulate the market, they will. Some smarter and more subtly than others, but manipulation is part of the game. So what’s new? The power and speed of that manipulation, and the nature of the manipulators. Despite what the mutual fund industry would have you believe, there’s no risk-free lunch: buyers and short-sellers beware.
Regardless, all the focus on last week’s winners and losers misses the most important point:
Until recently, the gates to real wealth creation have been closed to all, except the wealthy. Technology, and the cost-effective fractionalization of ownership it enables, is propelling a capital markets transition from, as a friend of mine wrote, “a tiny number of gigantic balance sheets to a gigantic number of tiny balance sheets.” Portfolio diversification is the single most important tool in our financial toolbox and the way to use it properly is through investment in alternative assets.
At Alto, it’s our goal to empower the tiny balance sheets, help them grow, and speed portfolio diversification for all. The 60/40 public stock/bond portfolio—the set it and forget it, passive not active—approach to financial health and wellness stands to deliver nothing but poverty and a lack of dignity for tens of millions of Americans over the next 30 years. Ever wonder why pension funds no longer exist and many that do are grossly underfunded? Three major reasons:
1. The value of the dollar is depreciating over time.
2. We’re living longer than expected.
3. Counting on annual public market returns of 6-8% turns out to be a fool’s bet.
I find data helpful here. Did you know that 0.001% of the 26,000 companies ever to go public account for 30+% of all market returns, and just 4% of all public companies comprise 100% of all returns? This means the other 96% are entirely irrelevant from a wealth creation standpoint. (If you want to dig in deeper, google Hendrik Bessembinder’s 2018 study in the Journal of Financial Economics, “Do stocks outperform treasury bills?”)
As if those stats weren’t shocking enough, if the stock market performs over the next 10 years in such a way that the 20 year return approaches the average return (5%) over the nearly 90 year history of the market, the result starting today would be a -2.6% return. Over the next 20 years it would be just 1.2%.
We can all take the data from the past 90 years, present returns over specific 10, 20, and 30 year periods, and bolster an argument for a desired investment philosophy. But we don’t live in the past. We live now. And with a little luck, we’ll live for the next 10, 20, 30… 50+ years.
On average, we have 2-5% of our portfolios in alternatives. Today, pension and endowment funds frequently hold 25-50% of their assets in alternatives. Is it right to expect current and future generations of investors to generate the necessary retirement returns solely from the public markets, while the professionals pile into private alternative investment opportunities with expected higher returns?
It is our mission to alter the current trajectory of life and financial peril too many of us face in what used to be our retirement years. Needless to say, we’ve got a lot of work to do to deliver on this mission, but it is what drives us.
We are in this Altogether.
All my best,
Eric
Founder & CEO