Welcome to Kitco News’ 2023 Outlook Series. Uncertainty continues to dominate financial markets as central bank monetary policies push the global economy into a recession to cool down inflation. Stay tuned to Kitco News to learn from the experts on how to navigate turbulent financial markets in 2023.
(Kitco News) – With the year quickly winding down, 2022 will be remembered as one of the worst in recent history for the traditional 60/40 portfolio. Both bonds and equity saw sharp losses this year as the Federal Reserve raised interest rates at the fastest pace in 40 years to combat inflation.
With the Federal Reserve expected to keep interest rates elevated through 2023, the new year could prove to be as challenging as the old one, which means investors need to pay more attention to alternative assets like private equity, private credit and real estate, according to one fund manager.
In a recent interview with Kitco News, Michael Weisz, founder of Yieldstreet, said the U.S. is already in a recession and conditions will only continue to deteriorate as the Federal Reserve maintains its aggressive monetary policy stance.
He added that in this environment, it is becoming more and more challenging for investors to build wealth.
“You can’t even sit in cash anymore. You can’t sit this market out because inflation is eating away at your purchasing power,” he said. “You need to be smart and thoughtful and get invested.”
Yieldstreet is a leading platform for retail investors to access private markets, which Weisz said is becoming increasingly important as the Federal Reserve tightens interest rates and reduces market liquidity.
Weisz said that because access to traditional markets is getting more challenging for many new and growing companies, they are now forced to turn to private markets for capital. He added that this is creating new opportunities for investors.
Weisz noted that there are reasons why endowment funds, pension funds and investment firms have significant exposure to alternative assets. He explained that private markets have outperformed traditional markets and also help to reduce volatility in investor portfolios.
Regarding how big of a position investors should be looking to build, Weisz said that real estate, private equity and private credit should make up about 40% of a portfolio and could eventually expand to 50%.
“Pension funds and endowments invest up to 55% of their assets in private markets and that is what retail investors should try to achieve,” he said. “If you don’t have access to private markets in your portfolio, you are underperforming.”
While jumping into private markets can be daunting, Weisz said there is a lot of potential in the marketplace. He said that the key is to remain diversified.
He added that investors should diversify their alternative asset exposure into three categories. The first is private credit and equity. Weisz said that investors should look for shorter-duration, cash-flowing assets.
“There are a lot of variables and unknowns as to how the macroeconomic backdrop is gonna shape and having shorter duration credit gives you a little more flexibility,” he said.
The second tranche is real estate. 2022 has been a terrible year for the U.S. housing markets as new home buyers have faced elevated home prices and rising mortgages. Although home prices are expected to fall in 2023 on weaker demand, Weisz said that the housing market remains a solid long-term investment option.
“Real estate is a great way to build long-term wealth,” he said. “In the housing market, the highs of the last cycle traditionally prove to be the lows of the new cycle.”
Weisz added that he expects the housing sector to outperform commercial real estate.
The third tranche of an investor’s updated portfolio would be alternative assets such as art and other collectibles which gain value over time.
“The upper end of the art strategy performs in the mid-teens, year after year. It doesn’t really matter what’s happening,” he said.
“The most important thing to take away is that diversification is critical,” he said. “Don’t, don’t pick a favorite; build a healthy, balanced portfolio.”
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