Levantine & Co. (Pty) Ltd
More and more start-ups are emerging on the scene and achieving success. Many are being sold to larger companies, private equities, or venture capital firms for big tickets every year.
If your start-up is one of these, you now have an essential question: where do you invest your money?
It's essential to make sure your hard earnings continue to pay off, so you should carefully decide what to invest in and how.
Before even considering different investment options, it would be good to determine your objectives:
Wealth Preservation: To preserve your recently accumulated wealth, you want to diversify across different investments. You are never at risk of losing it all. Many asset classes include real estate, bonds, equities, ETFs, commodities, private equity, hedge funds, venture capital, and fine art. Other levels of diversification could be geographical, currency, and maturity. Diversification is to combine different asset classes with varying risk profiles and low to negative correlation. A risk-off event negatively affecting some investments would positively impact others, reducing the overall risk and drawdown of the whole portfolio.
Estate Planning: You would want to leave some wealth to beneficiaries, including your immediate family and/or others such as organizations and causes you care about (philanthropy). To achieve these objectives, you may need to set up several structures like Preservation Funds or Internation Pensions. It is essential to mention that the chosen structure needs to be recognized by your tax authority.
Finally, invest in what makes you happy and passionate.
It may be wise to allocate a portion of your wealth to real estate, precisely the place you would like to call 'HOME'. Real estate would fall into wealth preservation rather than investing to accumulate wealth or generate Income.
Investing in Real Estate
Real estate investing offers many valuable options to suit your specific needs and investment interests. There are different opportunities in this space.
You could invest in residential or commercial properties (offices, retail, hotels, etc.) to generate a stable income.
Real estate as an asset class is considered an inflation hedge. At the same time, they perform better in low-interest environments. Lower interests increase the investor appetite and affordability, which results in capital appreciation. As a result, you can simultaneously achieve value appreciation and recurring Income.
It is usually easy to use leverage (mortgage loans) to buy real estate as banks prefer to lend against hard assets. Leverage could help improve the return on investment on real estate investments.
The most significant risk in real estate investments is that they are not liquid, and during downturns, it may take a long time to divest.
Fixed Income Investing
Investing in Fixed Income focuses on preserving capital and Income by typically investing in government and corporate bonds and money market funds. Fixed Income can offer a steady income stream with less risk than stocks. There are different risk levels among fixed income instruments as well.
Government and corporate bonds are usually assigned credit ratings by global rating agencies such as S&P, Moodys and Fitch. The agencies evaluate the risk of default in these issuances or, put another way, the risk of not getting your money back. In that sense, investment-grade bonds are less risky compared to speculative-grade bonds. As a result, the returns of the former are lower. Other risk factors are seniority and maturity of the bonds.
Bonds perform well in a declining interest-rate environment. As a result, their allocation in the portfolio should be determined based on interest rate cycles.
Investing in Stocks
Investing in stocks is another area that has become increasingly accessible for regular people. But your payoff with this method will mostly depend on how much risk you're willing to take. Low-risk investments tend to offer slow, steady returns over long periods.
Trading and investing in stocks are very different in terms of investment horizon, risk, and return. Trading requires significant experience and an excellent understanding of the market dynamics, trends, intrinsic valuation, and psychological biases. As a result, it should be done appropriately by professional investment managers. Moreover, long-term investors in stocks have statistically generated better returns than traders.
Short-term trading can be exciting, and the potential to make a quick buck is alluring. Your money is hard-earned. Acknowledge that you are not a professional trader and focus on long-term investing (preferably with a 5-10 year horizon).
Diversification is also essential in investing in stocks and can be achieved with 20 equities that are not highly correlated. You can choose thematic ETFs (exchange-traded funds), which constitute a basket of stocks geared towards a specific theme. These themes could be alternative health, cyber security, metaverse, online consumption, sharing economy, fintech, agriculture, climate change, etc. ETFs, help you diversify further and can sometimes be better than cherry-picking individual stocks.
Investing in Other Start-ups
Start-up investing has become more accessible to everyone in recent years, primarily through crowdfunding platforms.
Amazingly, a whopping 90% of all start-ups fail, making investing in them very risky. However, it's important to remember that most start-ups are either self-funded or backed by loans, friends, and family. Only 3% raise money through crowdfunding, and 1% get venture capital.
There are also different stages of start-up investing (or Angel Investing). The earlier you are in the game, the higher the risk of losing your invested money. On the other side of the coin, as risk and return are highly positively correlated, you can multiply your investment if the business thrives.
Direct angel investments or indirect investments through Venture Capital firms are long-term and illiquid investments. As a result, allocating such investments in your portfolio should not be high.
Multi-Asset Strategy Portfolios
Multi-asset strategies offer investors exposure to a broader range of assets, sectors, strategies and direct investment exposures (e.g., individual securities, bonds) with greater flexibility. They diversify across traditional and non-traditional asset classes. The goal is to provide the opportunity for growth while carefully managing risk.
Multi-asset investing has traditionally depended on diversifying among assets with low correlation to reduce volatility and create a smoother investment journey. However, a simple diversification may not effectively reduce the risk of permanent capital loss. Multiple assets can be overvalued simultaneously. In addition, since valuation anomalies tend to be driven by investor sentiment, the same economic developments can affect investments in different asset classes.
Unlike "traditional" balanced funds, multi-asset strategies' performance success is not measured against a specific benchmark. Instead, the strategy focuses on a particular outcome - such as a targeted return above inflation.
A multi-asset portfolio aims to navigate potential market shifts through tactical trades, tilts and factor exposures. It has the flexibility to respond to changing market conditions, seeking out areas of greater possible return while attempting to avoid sectors that could add unnecessary risk to a portfolio. Multi-asset solutions rely on dynamically allocating portfolios based on strategy views and outlooks.
Multi-Asset strategy portfolios can be considered the backbone of an individual's investment portfolio. Moreover, one can start to invest in their portfolio before a significant liquidity event, like the sale of their company. Investing early on allows individuals to understand their investments and be well-positioned well before their successful exit.
If you have any questions on any of the subjects discussed in the article, please do not hesitate to contact the Levantine & Co team.