The Wealthy vs Main Street vs Wall Street

It should be very clear to everyone by now that the wealthy invest very differently from the Main Street investor.

They zig when everybody else zags. That’s why they’re wealthy. Take for instance Main Street’s fascination with index funds. The wealthy couldn’t be bothered with them.

Main Street investors gravitate to index funds for their convenience and – compared to mutual funds – their relative inexpensiveness. For investors who don’t have the time or disposition to research and track individual stocks, index funds are appealing.

Index funds track the market fairly consistently and consistently beat actively managed funds like mutual funds and hedge funds. Why pay 9x the cost for expertise when the so-called experts rarely even beat the market?

NOTE: This is about the 2022 inflation and interest rates scenario

Richard Duncan is an Author, Economist, Consultant, and Speaker who authored four books illustrating the causes and effects of economic crises.

He discussed the foundation, how the economy and the Fed work, the relationship between gold and the dollar, and understanding our economy.

So, why do the wealthy ignore index funds?

They ignore index funds for the same reason they ignore most Wall Street investments: they’re not content to make “average” returns, they want to beat the market and save a lot of taxes in the process. I don’t go into the deal without an unfair advantage. Some would call this insider trading.

The wealthy look outside the box and venture into asset classes Main Street investors are hesitant to indulge in and frankly don’t have access; specifically, alternative assets available through private markets because they lack the relationships.

Private investments tend to be tagged “high risk” because higher-risk alternatives such as hedge funds and venture capital tend to get lumped with lower risk, less market-correlated assets like private debt and commercial real estate. However, the wealthy have learned to reduce alternative asset risk through various mitigating strategies to generate above-market risk-adjusted returns.

One of the mitigating strategies adopted by the wealthy is an allocation to income-producing assets. Income-producing investments backed by hard assets don’t fit the traditional risk-reward paradigm.

High returns don’t necessarily translate to high risk with these types of assets. Because of the cash flow factor that increases returns over time from the compounding effect, it is actually possible to achieve high returns at a reduced risk because of the security offered by the underlying asset. This is particularly true for assets that thrive in a downturn.

Another mitigating strategy the wealthy use is multi-tiered diversification. The problem with public equities is while diversification is achieved through acquiring multiple stocks across multiple industries to minimize risk in good times, no amount of diversification will save your portfolio in a market crash.

While diversification on Wall Street typically comes at the cost of returns as risk is reduced, diversification in the world of income-producing alternatives doesn’t necessarily mean reduced returns.

Multi-tiered diversification of alternative assets is less about lowering risk at the expense of returns and is more closely associated with creating multiple streams of income to preserve cash flow and appreciation.

The wealthy gravitate to income-producing alternatives because these assets lend themselves to diversification across a variety of variables including:

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  • Minimizing PITA: No more managing tenants, vacancies, maintenance and the managing the manager (who is a $12-20 dollar employee who’s compensation structure us not aligned with your goals) By passing the control of the day to day operations to true experts who are literally partners (direct alignment of compensation and motivations), you can assure the investment is being optimized while you spend your time on what you want which is 1) making more money at your day job, 2) spending time with your family or 3) finding that one off deal that you want to do one your own while pairing with a Limited Partner strategy.
  • Asset Diversification:  Many commercial real estate investments have high acquisition prices (think $10M+) where most people don’t  have access to. You want to get away from these other Mom and Pop invests like these 1-40 units. When I was a syndication newbie and thought I could do everything by myself and did not trust anyone. I then realized in a few months that 1-40 unit deals had horrible pricing because all the amateurs were involved and the ones that looked good from a per unit price prospective were under 80% occupied and had ISSUES.  Investing passively in a group can allow you to invest in multiple asset classes (apartment/mobile home/assisted living), in multiple locations and with varying business plan duration.
  • Avoid Credit and Liability Risk:  Investing passively allows one to avoid being exposed to credit or liability risk.  No W2 documented income no problem!  You do not need to personally guarantee multi-million dollar loans and and be the fall guy. Plus now you can get into all the travel hacking credit cards and tradelines you want (Simplepassivecashflow.com/tradelines).
  • Cash Flow:  The goal of a LP syndication investor is to create a “ladder” of investment that create accumulated cashflow and cashout at different times. It’s like your grandpa’s CD ladder strategy but with 10-30x returns.
  • Taxes: All the deprecation benefits of single family home being your DIY direct investing but even better! Bigger deals are able to pay for a cost segregation to squeeze out even more depreciation. More info.
 
 

All of these factors serve to preserve one thing – income/cashflow – essential for growing and maintaining wealth even in the midst of turbulent times.

To achieve those above-market returns, wealthy investors are willing to give up liquidity. In fact, they welcome illiquidity because it prevents the type of volatility that destroys wealth on Wall Street (based on emotion).

That’s why 33% drops in the Dow like in the early days of the 2020 pandemic didn’t faze them. Not being heavily allocated to public equities means continued cash flow from insulated assets – assets found only in the private markets.

Wealthy investors willingly give up liquidity to achieve:

    • Above-Market Returns
    • Non-Correlation to Wall Street
    • Consistent Income Stream
    • Management Transparency
    • Long-Term Growth
    • Expert and Efficient Management
 

The wealthy ignore index funds because they’re not satisfied with average returns.

That’s why they’re constantly in pursuit of above-market returns – the type of high risk-adjusted returns found only with income-producing alternative assets in the private markets.