This shouldn’t come as a surprise, but the world is changing. There’s not a day that goes by that we don’t hear about a new story confirming that Artificial Intelligence and other technologies are transforming the way we work and live.

From Alexa and Siri to self driving cars, the world is automating. Automation in and of itself isn’t a bad thing. It’s what started the previous industrial revolution. But the level of automation we’re seeing today does have implications for how we earn, save and invest money.

Expect Lower Returns in the Near Future

We’re in an era of ultra low interest rates, low growth, low labor force participation, high household debt, stagnating wages and high stock market valuations. None of this bodes well for a business as usual approach to investing. According to the Shiller Price to Earnings ratio, we have an implied future return on stocks of -2.5%. You read that correctly. According to this ratio, putting money into the market now will be worth less over the medium term than it is today (not to mention inflation lowering the real value even more). Ray Dalio, the head of the largest hedge fund in the world, says that returns will be in the vicinity of 3-4%. Regardless, these are below the long term average of around 7-8%.

investment diversification

Shiller Price To Earnings Ratio

I know what you’re thinking, “My salary won’t really be going up and the projected returns on my 401k are somewhere between negative and low. Thanks for painting a shitty picture of my future retirement.” With these kind of returns we’ll all be cutting someone’s grass at the age of 70. I like to exercise, but I don’t necessarily want 3 jobs after I retire.  

New Opportunities for the 99%

We all acknowledge the world is changing, but why hasn’t our idea of asset classes and diversification changed? In a typical portfolio (like the one in your 401k) you’d want a mix of domestic and foreign stocks, plus corporate and government bonds and perhaps even a sprinkling of Gold. This has more or less been the same for the last 100 years.

The thinking goes that by diversifying your investments in relatively uncorrelated assets, you can earn stable long term returns. I agree with the premise, but not necessarily that stocks and bonds are the only show in town. That diversification has worked relatively well in the past, but now we’re in danger of succumbing to the small print of every mutual fund brochure; “past performance is no guarantee of future results.”

Luckily, individuals have more investment choices today than at any point in previous history. The recent boom in Fintech has worked to democratize the investment choices so that it’s no longer the 1% that can truly diversify.

Of course young Jedi, with great power comes great responsibility, but let’s take a look at some of the ways you can diversify even further and hopefully beat -2.5% returns.


bitcoin price

Historical Bitcoin Price

Currencies such as Bitcoin and Ethereum are digital currencies which are attached to no central bank or single administrator. They’re not backed by the “full faith” of any government. These are truly democratic currencies based more on supply and demand than anything else.

They can be used to purchase certain goods and services as well as held as an investment.  

Since 2010 the value of Bitcoin has risen from Zero, to around $5,700 (as of Oct 25 2017). Wish I had jumped on that bandwagon a little earlier. It’s still early days and it’s already had a huge run. One thing to note with these types of investments is the price swings (volatility). They can have large swings from day to day, so if you’re sitting around checking it every 5 minutes, you’ll get ulcers. But I recommend you don’t invest in anything if you’re watching the daily movements of your investments.

To be fair there have been some recent heavy hitters such as Jamie Dimon who have called cryptocurrencies a fraud. Of course, there could also be a conflict of interest when the underlying technology (blockchain) is set to disrupt the banking industry.

If you’re interested in getting started then Coinbase  is the largest global site for investing in crypto currencies. You can also learn more about cryptocurrencies from sites like coindesk.

Initial Coin Offerings (ICO’s)

We’ve all heard of IPO’s (initial public offering) which is when a private company decides to list its shares on a public stock exchange. An ICO is very similar. Essentially it is crowdfunding with a cryptocurrency where a new cryptocurrency is issued and a percentage of the newly issued cryptocurrency is sold to investors in exchange for legal tender or other cryptocurrencies such as Bitcoin. However, unlike IPO’s this is an entirely unregulated way of issuing shares and therefore is more open to abuse.

This way of raising capital is still in its infancy and is a bit like the wild west. Imagine Bitcoin in 2010-2011. As an example, ICO’s were recently outlawed in China.

However, in the future, as the regulation becomes more clear, it could become a recognized and viable option for companies to issues shares in a much less expensive way allowing average people to take part in the offerings.

Equity Crowdfunding

equity crowdfunding

Equity Crowdfunding

This is similar to venture capital. Young companies that need capital in order to grow their business issue shares (equity) of their private company in exchange for capital. This type of investing is further along than ICO’s.

I would say that in a lot of ways, Europe is leading the way on this. That’s mostly because previously, regulation in the US forbid non-accredited investors from investing in startups and there are still limits to the amount a non-accredited investor can invest each year.

Most platforms do some type of due diligence on the companies registering for funding, but keep in mind that most startups fail within the first 5 years. So if you want to be rewarded like a venture capitalist, you’ll be taking similar risks.

Another thing to note is that unlike shares of public companies, there’s usually little if any liquidity of private companies. This means there are no exchanges to sell the shares on a secondary market. Some platforms offer that capability, but it is platform specific. This also means you’re locking in that equity until the company is sold, or lists on an exchange which could be years away.

Here you can find a list of Equity Crowdfunding sites in the USA and Europe.

Peer to peer / Peer to business lending

peer to peer lending

Peer to Peer Lending

Remember when you lent your roommate money to cover rent? Believe it or not, that was peer to peer lending. The only difference is you probably never got the money back and if you did, you certainly didn’t get any interest.

Traditionally lending larger amounts of money to individuals or companies has been the sole domain of banks. Nowadays for as little as $25 on some platforms you can invest in a portfolio of loans with varying degrees of risk and earn a respectable return. Each platform tends to specialize in making particular types of loans such as personal loans, consolidating student loans, business lending, and even mortgages.

Here you can find a list of P2P lending sites in the USA and Europe.

Re-evaluating Risk

You should approach each and every one of these investments with an open mind as well as a fair bit of scepticism. You should also note that these are emerging ways for an average person to invest, however most of the investments themselves have been available to the top 1% of investors for a long time.

Investing in currencies (Forex), providing equity for new companies (venture capital / Private Equity), Realestate (owning rentals, REITS) and Loans (structured notes) have been good ways for high net worth individuals to diversify their own wealth. So it’s more about the democratization of who can invest and how it’s done, than the investment classes themselves.

All investments carry some form of risk and I think we delude ourselves when we believe we understand the risks associated with Stocks and Bonds fully. Even though we believe we understand today’s risks, we still end up with events like:

losses from financial crisis

Output Loss from Financial Crisis: Federal Reserve Bank of Dallas

Have you got the warm fuzzy feeling of enlightenment or rage from seeing the numbers in black and white? Do we understand risk? Perhaps we understand it, but we can’t control what happens.

As with everything in life, “Caveat Emptor”. Just remember that with -2.5% to 4% returns projected for the Market moving forward, you may want to consider branching out a little and exploring what else is available for you.

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