It may seem surprising, but one of the biggest challenges facing many investors is the social pressure from their community and circle of friends. It’s quite common for people to exhibit conformity bias — where they behave according to, and make decisions based on, what others around them deem acceptable. However, adapting your investment approach to be similar to that of your friends and family can be detrimental to achieving your financial goals, since every person’s goals and financial situation are different.
From my experience, wealthy investors are the most susceptible to falling into the conformity bias trap. Looking at their portfolios quickly confirms this. There are certain investments that are more easily accessible to high-net-worth individuals. Those opportunities sound exclusive, exotic and generally require high initial investment minimums in order to participate. They also make wonderful conversation at the country club, golf course or other venues that may attract a similarly affluent clientele.
Unfortunately, many of these more exciting investments make sense for only some investors and typically should not represent more than a small portion of one’s overall portfolio. It is generally ill-advised to have your entire nest egg tied up in these strategies. Below are some examples of these investments that can be found in the “country club portfolio.”
Private Equity (PE)
PE funds typically invest in companies that are not publicly traded. Some common examples are venture capital and leveraged buyout funds. Most PE firms are exclusively open to high-net-worth investors.
While there is the potential for high returns, investors need to be comfortable parting with their money for an extended period of time, sometimes between five and 10 years, while the strategy is implemented. In addition to the lack of liquidity, there is the possibility that the investments won’t work out or will substantially lag the public markets.
Hedge funds are actively managed pools of capital whose managers use a wide range of aggressive strategies to deliver outsized returns. This may include using borrowed money to make investments and trading more esoteric assets.
In recent years, hedge funds have been broadly criticized for their high fees and lackluster returns relative to the overall market.
Real Estate Syndication
Real estate is a wonderful asset class with which many investors are familiar. One way to get exposure to this area of the market is through a real estate syndication, where investors pool funds to purchase income-producing properties. The success of these types of deals depends on the location of the opportunity, type of property, management of the project, and experience of the deal manager.
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