Easy Access Results in Panic Choices

TruePoint Capital

Imagine if you left in January for a remote jungle to work with an indigenous tribe in some remote part of the world. You committed to work with them for one year and to live as they did – by living off the land free of any modern conveniences.

You leave all technology behind – no phones, no TV’s, no contact with the outside world. You keep your analog watch to keep track of time. After all, you’ve been given instructions to meet up at your drop off point in exactly one year at precisely 0700 hours for your extraction. You don’t want to miss that.

You leave your family behind, but they’ll be taken care of. Your investment portfolio of cash flowing alternatives in commercial real estate, agriculture, and energy – all backed by tangible assets – will ensure your family will continue to receive income while you’re gone.

The one benefit of your alternative investment skewing portfolio is that you’re locked in for a minimum of another 3-7 years on all your assets. That means there will be no maintenance involved, and you’ll be free to focus your attention on the tribe.

Fast forward to 2021, and you return to find out that some virus called COVID-19, or Coronavirus, wreaked havoc on the economy.

Originating in China, the virus managed to do what North Korean hackers had only dreamed of – bring the U.S. and world economy to a screeching halt.

You were surprised to find out that COVID-19 wasn’t some strange disease that caused insanity, raging fevers, or certain death. Its symptoms were milder than the flu, yet it somehow managed to disrupt the worldwide economy completely. It managed to close borders, shut down international travel, businesses, factories, theatres, and sporting events.

Perhaps most surprising of all is that COVID-19 took a disproportionate hammer to the stock market compared to the actual toll it took on human lives. Total deaths in one year were a fraction of deaths from the flu.

You’re scratching your head as to what could have happened to decimate the stock market. Logically, you decide to check on your investment portfolio.

You were light on Wall Street, allocating less than 10% of your assets to the public markets, so you weren’t too worried about the collapse of the broader markets on your portfolio. To your surprise and not to your surprise, your portfolio performed better than most people you know.

Made sense that your portfolio didn’t suffer like others because, with your alternative investments in commercial real estate, agriculture, and energy, it turns out people still needed shelter to cover their heads, food to feed their bellies and energy to take them from place to place and keep them warm. Those basic needs were never going to go away.

With you and your fellow investors locked in on an average of 5-12 years, you were all immune from mass panic and sell-offs of your assets that would have decimated your portfolio. Sure, there was a slow down in demand with some of your assets, but nothing compared to the drop in the stock market.

For your acquaintances heavily invested in the stock market through individual stocks, mutual funds, 401k’s and IRA’s, the picture was bleak.

You find out that at its lowest point, the Dow had shed more than 50% of its value – matching the drop during the last Financial Crisis.

You wonder to yourself, “If COVID-19 took fewer lives than the flu did in a year in the U.S., why did it take 50% of the economy with it?” Then you realize, it’s because Wall Street has a self-destruct button that’s far too easy for investors to access.

The same easy access, convenience, and liquidity that allows investors to check on their portfolios and to buy and sell instantly on their phones and now their watches are also the reasons why a crisis like COVID-19 can be blown way out of proportion. Easy access resulted in panic.

As investors headed for the exits, nobody wanted to be left holding the bag. Investors that sell off their investments in a freefall never fully recover their losses when they decide to reenter the market.

When the market bottomed out in 2009, it took six years for the Dow to return to its pre-crash levels. Investors who bailed in 2009 never fully recovered their losses.

Disciplined investors who rode out the storm and stuck to their investments in the long-term, not only didn’t lose money but saw their portfolios grow.

Whereas Wall Street has a self-destruct button called liquidity, alternative investments have a fail-safe mechanism called illiquidity.

With lockup periods of 5-12 years, investors in alternative investments like private investment funds are prevented from hitting the panic button because there isn’t one.

Illiquidity saves investors from each other and themselves. Ironically, if stock investors imposed on themselves a lockup period of 5-12 years, they would avoid losing their shirts in panics induced by crises like Coronavirus.

Savvy, affluent investors have been investing in illiquid assets for years. It’s to avoid panic-induced crashes exactly like the one caused by COVID-19.

To them, it doesn’t matter what disaster looms on the horizon because they know with an investment window of 5-12 years, their portfolio would weather any storm.

That’s what gives affluent investors the comfort and ability to leave for the so-called jungles for years at a time. In the long-term, they know they’ll still accumulate wealth.