According to traditional investing thinking, there are two ways to invest, for growth, income, or a combination of both. Growth and income also fall on opposite ends of the risk/reward spectrum, with equities representing growth assets and fixed income representing income assets.
A portfolio containing a combination of both would look like something below on the risk/reward spectrum:
The graphic above implies that as you allocate more towards income assets, you reduce risk but sacrifice returns. On the other hand, as you allocate more towards growth assets (i.e., stocks), you increase potential returns but at higher risk levels.
Typically, investors allocate more toward fixed-income assets in an economic downturn to preserve capital. These low-risk investments may offer protection from market volatility, but they only slow the bleeding, not stop it in an inflationary environment like the one we’re in.
The problem with traditional fixed-income assets like certificates of deposits (CDs), money market accounts (MMA’s), high-yield savings accounts (HYSA’s), U.S. government treasuries, corporate bonds, and annuities is they usually don’t even keep pace with inflation. For example, with inflation currently hovering around 7%, even the best-performing fixed-income asset (e.g., a 5-year CD paying 5.0%) would be losing money.
The problem with the traditional view of growth vs. income investing is that Wall Street wants you to believe that you can’t have one without the other and the only way to get a mix of growth and income is through a mix of growth assets (i.e., stocks) and fixed income assets (i.e., bonds, etc.).
Is there a way to achieve both growth and income without sacrificing returns? YES!
There is a way to achieve both growth AND income and do so at reduced risk without sacrificing returns. It can also be accomplished with a single asset, but you won’t find it in traditional markets, and finding it will require you to break out of any preconceived notions about risk/reward and look outside Wall Street.
Risk Does Not Equal Loss
Wall Street will have you believe that the only way to achieve higher returns is to take on more risk and be prepared for potentially bigger losses. Now, if you gravitate towards income, you’ll reduce risk but give up returns. This is all Wall Street bologna that they want you to believe in staying and keep playing in their sandbox. What they don’t want you to know – something the ultra-wealthy have known all along – is that there is a class of assets that offer both growth AND income and can do so at reduced risk.
The two classes of assets favored the ultra-wealthy for generating growth, and income won’t be found on the NYSE, NASDAQ, or some cryptocurrency exchange. These alternative assets can only be found in the private markets, and they are:
- Private Company Investments (Private Equity or PE).
- Commercial Real Estate (CRE).
Why PE and CRE?
Commercial real estate and income-producing private businesses promise both income and growth because of the nature of their business and because they are tangible assets that appreciate naturally and from their intrinsic value over time.
Natural appreciation occurs through inflation as the price of goods and services appreciates over time. Assets with intrinsic value appreciate because of the worth these assets build over time because of the valuable goods and services they provide. This is completely separate from what the investors are willing to pay for them on the market, which can be impacted by factors like buzz and hype that have nothing to do with underlying value.
Sophisticated investors have long heavily allocated to PE and CRE for not only income and growth but for the following benefits as well:
- Insulation from Wall Street volatility.
- Tax benefits.
- Ability to leverage time, experience, infrastructure, and knowledge of seasoned experts.
- True diversification across multiple assets and geographic locations to shield income against recessions.
- Inflation hedge.
How is reduced risk possible?
Non-Correlation to Public Markets. Due to their nature as private investments, private equity, and CRE are naturally insulated from broader market volatility due to their illiquidity. By not being traded on a public market, these assets are insulated from herding behavior that can result in massive portfolio losses within a matter of hours and days.
Partnerships. The ultra-wealthy know that both income and growth are essential to wealth, but the key is to do it passively and create multiple streams of it to cut the umbilical cord to the time clock and free up your own time to do what you want on your terms.
Partnering with seasoned, knowledgeable, and experienced experts is the key to generating multiple streams of passive income and mitigating risks.
Because private investments are more transparent because they are the principals of these private companies doing all the fundraising, these managers make themselves readily available to potential investors to answer questions. This lets investors get to know their potential partners well before entrusting their money to them.
Despite the typical Wall Street narrative, it is possible to invest for both growth AND income to achieve above-market returns at reduced risk. You won’t find these assets on Wall Street, though. You’ll only find them in the private markets.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.