For the past century, the stock market and public equities have taken over the world of investing and wealth building. People have come to rely on and built their 401(k) and brokerage accounts their entire lives to build wealth. When average people want “above average” or outsized gains, they either invest in individual or sector stocks/ETFs, open a business, or invest in real estate; however with these investments comes greater risks, barriers to entry, and a larger time commitment. What if I told you there is an easier way to earn alpha (when an investor earns “alpha” all that simply means is beating the stock market), and to earn a higher return than the annualized 7% we are used to seeing, all passively? Thanks to the 2012 JOBS Act and increasingly laxed SEC regulations, now you can.
We at FundingFuel are researching the cutting edge of finance, economics, fintech, and the franchise industry, and are of the belief that alpha generation in the future will be driven by (primarily crowdfunded) fractional alternative assets more than ever, perhaps eventually eclipsing the global equity market in terms of being a go-to when investors seek outsized returns; alpha. Why do we feel this way? Well, a few reasons:
- Passive Investing. Many alternative assets are becoming more and more passive. While in the past, in order to invest in an asset like land, thousands if not hundreds of thousands of dollars of costs had to be incurred along with some other responsibilities. Today, an individual investor can directly invest into farmland for as little as $100 – without the responsibilities of a farmer as the asset is usually operated by a separate entity. In terms of real estate, an individual who invested in a crowdfunded project would not have to deal with tenants, collect rent, etc. To purchase music rights in this new era would be easy and you wouldn’t have to deal with record labels, producers, artists, etc, as purchasing the music rights would be as easy as purchasing something within an app (note: these marketplaces already exist). These examples are only scratching the surface of asset securitization in our modern 21st century setting.
- Decreased Market Risk. Many crowdfunding platforms and alternative asset broker-dealers pride themselves on being able to provide to the general public assets that are of low correlation to the stock market or other public investments. A great counter-argument to alternative asset investing is that similar investments could be made on the stock market. Instead of investing in a non-publicly traded real estate project, why not just invest in a REIT? Why invest in a risky startup when one could invest in an established and reputable company listed on the S&P 500? Here’s why: because the latter choices would result in investing into a stock or equity that has strong correlation with the general equity and other public markets, at least more so than a majority of investments outside the equities market. Modern portfolio theory insinuates that an investor can reduce portfolio risk by holding a combination of securities that are not perfectly positively correlated. Building onto that, we feel as though implementing private or non-publicly traded assets into a portfolio will be crucial for investors in the near future. Individuals have previously tried to diversify their portfolios into more fixed income assets to avoid the volatility of the stock market, but in an era of lower interest rates these investments have been providing lower returns to investors. So how can investors diversify their portfolio without investing in a security that is heavily correlated to the market and is not riskier than their utility would allow? The answer is becoming more clear by the day: Crowdfunded alternative assets. Investors have flexibility when it comes to selecting which deals they want to invest in, without the risk of public market volatility; i.e. a local flower shop will most likely not be too affected by a drop in the stock market, whereas a public traded flower shop company most definitely will to more of an extent than the former.
- Investor Optionality and Asset Democratization. Modern, online marketplaces have given us the power of selection, having the ability to browse to our hearts content, whether it be shopping on Amazon for home supplies, looking for a new home on Zillow, and now even looking for your own business to invest in and own a fractional share of – like a public equity, or in everyday terms, a stock. When a person decided that they wanted to invest into a franchise in the past, it was not possible without putting in tens of thousands, if not hundreds of thousands of dollars up front; that model of business has now been disrupted thanks to newer guidelines and modern technology. Investing in a racehorse or collectible car is as easy now as downloading an app and selecting your investment.
- Social and Community Impact. Crowdfunded investments usually are not funneled into large multi-billion dollar companies – that is what the stock market is for. Many of these investments focus on smaller businesses, startups, and individual holdings/assets. While this may increase risk on a singular scale, it is possible to divert some of this risk away through diversification; which some crowdfunding platforms are exploring as well through fund models. When an investor puts money into a crowdfunded business, they are helping a smaller business or company help their local community, whether it be through providing jobs, community development, etc. the act of helping smaller businesses grow will only result in the benefit of the future of the world.
These are the basics, and pillars of FundingFuel’s research on crowdfunding, alternative asset classes, and emerging franchise trends/tech; these pillars are also key building blocks of our investment thesis and business model. We promise to continue to research and inform our followers/readers on this topic (trust us, this is just the beginning) – and make sure to provide you with more visuals, articles, and info bits going forward so you can be as informed as an investor as possible because that at our core is the true goal. Stay tuned…
Co-Founder, Chief Investment Officer