Alternative Asset: Deep Dive

Following the deep dive on Traditional Assets, this entry is focused on Alternative Assets  

To begin, let’s summarize our target allocations of 50% of ones’ total net worth. 

Alternative Assets: Target 50% | Actual %

Real estate: 10% | TBD

Commodities: 10% | TBD

Private equity: 10% | TBD

Cryptocurrency: 20% | TBD

Real estate: 10% - For my current situation, real estate requires more capital than I have, such that I cannot purchase entire buildings or acres of land by myself. So instead, I must purchase fractional shares of real estate, either as a limited partner or through other investment vehicles.  My current focus is on multi-tenant residential in growth areas of the United States, specifically Texas and Florida. I also believed that office real estate would be a safe complimentary space adjacent to multi-tenant residential. But the impact of work from home post-Covid has put a large strain on office real estate. However, due to the illiquid nature of selling capital intensive office parks, I feel I am stuck for now until the market either recovers or capitulates further. To clarify, as a limited partner, you do not have the control to decide when to sell or for what price; therefore the feeling of being stuck. 

NOTE: I do not include my personal residential real estate in this calculation for two intentional reasons. First, I am still in school and live with my parents so I have no residential real estate. Second, when I do have a home of my own, I do not want to over spend on a house with the mistaking believe that it is an investment. More precisely, an expensive personal residence will result in high up keep costs that I cannot recoup through higher rents, as I will be the person living there.  And it is for this reason I intentionally keep personal residential out of the investment category as they will not be income producing and are not discretionary.  In other words, I cannot decide to avoid the asset class of personal residential property as I need a place to live, therefore it is not an equivalent decision as it provides value and utility beyond that of an investment. 

Commodities: 10% - Commodities are one of my favorite investment areas, albeit with only 10% due to their high volatility nature.  Gold, oil, and uranium are the top three I focus on. Currently I like the short-near term thesis for gold and uranium. Underlying this thesis is one of energy; that the world will continue to need energy and at higher rates of consumption. Oil for energy to power cars and trucks, uranium for electricity to power data centers and also more recently, cars and trucks.  

And the second purpose of commodities in my models is one of inflation protection and a store of value.  Cryptocurrency will have its own sub-section below, but in addition, gold, for thousands of years, has been a relatively good store of value. Better than sea shells!  In fact, according to Luke Gromen, a long-time observer of gold prices, gold has held up better than oil in terms of value.  In the mid-2000s, you saw one ounce of gold buy 6 barrels of oil.  By 2016, that same ounce of gold could buy over 40 barrels of oil.  I believe this trend is going to continue, with oil losing more of its value relative to gold, and therefore I have been avoiding oil commodities, and pivoting those funds toward uranium which I believe will be the energy of the future over a long timeframe (i.e., over 100 years).  The explanation for the widening spread between gold and oil since 2020 is unknown to me, but I am interested in learning more and continue to research possible explanations as this appears to be a significant shift from historical norms.

Cryptocurrency: 20% - Controversial to be sure, a twenty percent allocation to Bitcoin and Ethereum.  And within that sub-category of 20% crypto, I am targeting 90% allocation in Bitcoin and only 10% in Ethereum. The two crypto have very different properties, protocols and purposes and therefore are not treated at parity.

Private equity: 10% - Another controversial subject, Private equity, sees a 10% allocation.  For this asset class, a number of firms known as BDC or business development company, provide capital to markets through debt and equity arrangements. Private debt and private equity, while nuanced and different as they provide capital in exchange for equity of the company or in exchange for a claim on the assets of the business and a guaranteed rate of interest (i.e., debt), for the purposes of this blog will be grouped together with the intent of simplification. That said, VanEck BDC Income ETF with the ticker BIZD offers an interesting way to gain exposure to private equity in your portfolio. BIZD offers exposure to approximately 30 different BDC firms with names like Ares Capital, Blue Owl Capital, and Golub Capital.  The idea behind this investment area is that you will collect consistent cash dividends of 10% while protecting your principal investment.