Investors have many investment choices beyond traditional asset classes. When evaluating investment options, investors should consider a number of important criteria. In this article, we compare returns, risk, liquidity, and ease of access across each asset class.
In the chart to the right, we map asset classes based on risk and return similar to the Capital Asset Pricing Model (CAPM) which describes the relationship between systematic risk, expected return for assets, and cost of capital. Investors expect to be compensated for risk, the time value of money, and the cost of money. The higher the risk, the higher the reward.
For example, the T-Bill at the lowest risk profile has less than a 1% return rate. While it is true that aggressive growth stocks can be more volatile, the style has returned 31%, 23%, and 16% annually over the past 5, 10, and 15 years respectively.1 For investors seeking superior returns with a longer investment time horizon, aggressive growth becomes ever more attractive on a risk-adjusted basis.
When investing, however, there are additional considerations beyond returns and risk. Liquidity and ease of access are also key.
When considering products such as private equity, venture capital, real estate, and certain hedge funds, hold time must be factored in as they are either closed-ended funds with a long-term hold of up to 14 years or have 3-5 years terms with early withdrawal penalty fees. An illiquidity premium is an additional return expected for the additional risk of tying up capital in a less liquid asset. During periods of financial crisis, investors may need to liquidate high-performing investments to provide cash liquidity and hold onto what could be under-performing investments in their portfolios due to liquidity terms. Therefore, illiquid investments must provide excess performance relative to liquid investments to compensate for the illiquidity. Plus, vehicles in illiquid asset classes often struggle to deploy all their capital, creating the possibility of being underleveraged.
Most investors seeking a broader set of quality investment products cannot access them due to high minimum investment requirements and the complexity of investments. Private equity and venture capital are broadly considered the most restrictive in terms of investors ability to access these types of investments. This is followed by hedge funds and real estate. For many hedge funds, the minimum investment could be $1 Million or higher which is out of reach for most investors. Additionally, they are often complex instruments and may require a higher level of due diligence. The most accessible asset class is direct public equity stocks or ETFs, however, accredited investors can access niche alternative equity strategies that can provide differentiated and tailored solutions for portfolio construction that outperform direct stock or index investing.
When looking to maximize returns, the highest performing asset classes are stocks, private equity, and venture capital. Of these three, stocks are the easiest to access and most liquid. Within stocks, aggressive growth has produced the highest returns historically. While the risk profile of aggressive growth stocks is slightly higher than stocks as a whole due to higher volatility, volatility is reduced when investing with a long-term time horizon (as illustrated in the chart below).
* Investment Style Index (1958-20210) consists of Weisenberger Mutual Fund Report, Frank Russell Company, Golden Eagle Strategies research
Investors have many investment choices beyond traditional asset classes. When evaluating investment options, investors should consider a number of important criteria. In this article, we compare returns, risk, liquidity, and ease of access across each asset class.
In the chart to the right, we map asset classes based on risk and return similar to the Capital Asset Pricing Model (CAPM) which describes the relationship between systematic risk, expected return for assets, and cost of capital. Investors expect to be compensated for risk, the time value of money, and the cost of money. The higher the risk, the higher the reward.
For example, the T-Bill at the lowest risk profile has less than a 1% return rate. While it is true that aggressive growth stocks can be more volatile, the style has returned 31%, 23%, and 16% annually over the past 5, 10, and 15 years respectively.1 For investors seeking superior returns with a longer investment time horizon, aggressive growth becomes ever more attractive on a risk-adjusted basis.
When investing, however, there are additional considerations beyond returns and risk. Liquidity and ease of access are also key.
When considering products such as private equity, venture capital, real estate, and certain hedge funds, hold time must be factored in as they are either closed-ended funds with a long-term hold of up to 14 years or have 3-5 years terms with early withdrawal penalty fees. An illiquidity premium is an additional return expected for the additional risk of tying up capital in a less liquid asset. During periods of financial crisis, investors may need to liquidate high-performing investments to provide cash liquidity and hold onto what could be under-performing investments in their portfolios due to liquidity terms. Therefore, illiquid investments must provide excess performance relative to liquid investments to compensate for the illiquidity. Plus, vehicles in illiquid asset classes often struggle to deploy all their capital, creating the possibility of being underleveraged.
Most investors seeking a broader set of quality investment products cannot access them due to high minimum investment requirements and the complexity of investments. Private equity and venture capital are broadly considered the most restrictive in terms of investors ability to access these types of investments. This is followed by hedge funds and real estate. For many hedge funds, the minimum investment could be $1 Million or higher which is out of reach for most investors. Additionally, they are often complex instruments and may require a higher level of due diligence. The most accessible asset class is direct public equity stocks or ETFs, however, accredited investors can access niche alternative equity strategies that can provide differentiated and tailored solutions for portfolio construction that outperform direct stock or index investing.
When looking to maximize returns, the highest performing asset classes are stocks, private equity, and venture capital. Of these three, stocks are the easiest to access and most liquid. Within stocks, aggressive growth has produced the highest returns historically. While the risk profile of aggressive growth stocks is slightly higher than stocks as a whole due to higher volatility, volatility is reduced when investing with a long-term time horizon (as illustrated in the chart below).
* Investment Style Index (1958-20210) consists of Weisenberger Mutual Fund Report, Frank Russell Company, Golden Eagle Strategies research
Manager of the Golden Eagle Growth Strategy
