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Episode #580 - Should I Have Private Equity in My Portfolio?

“Complexity is your enemy. Any fool can make something complicated. It's hard to keep things simple.”

-Richard Branson.

Roger: Welcome to the show dedicated to helping you not just survive retirement, but to have the confidence because you're focused on the right things so you can go off and rock retirement.

Today is not the show I intended to have. We're going to move that to next week in order for us to have a conversation that I would like to address head on. We're going to talk about whether you should have private equity as part of your retirement portfolio.

The reason we're talking about this is this topic is coming up more and more. A few weeks ago, I had a meeting with a client, and during the meeting, they said, hey, Roger, I read this great book by Tony Robbins. It's called The Holy Grail of Investing. They talk about how the sophisticated investors and institutions have used private equities to have great returns and no correlations, et cetera, and why individual investors should have this as part of their portfolio. That opened up a great discussion for us to navigate that topic. Then a few days ago, well, actually about a week ago now, I sat on it for a few days, I received an email from a listener, David. So, here's the email, which is essentially the question we're going to try to answer today for him and for you.

David says,

“Hey, Roger,

I love your podcast. In podcast 577, you spoke briefly about private equity. The way you spoke about it made me think it was not for me, but I literally have an email from my retirement advisor waiting for my signature to move $200,000 into a private equity investment. I have about $3.2 million in assets, cash, house, and no debt. I was wondering which category I fall into with regards to private equity. I trust Edelman, but was hoping you could send me your additional thoughts on it. I must admit I haven't signed because I'm not sure if I need to commit that much to something new and, possibly with more risk.

Thanks, Dave.”

That is the question, Dave, that we want to try to help flesh out for you in today's episode. This podcast features an opinion or judgment on private equity in retirement portfolios

Now, this is going to be a little bit of a different kind of episode where there is going to be some opinion or judgment shared. One of the core things I use this podcast for in my mastery journey as a retirement planner is to think through something in an organized way so I can get to a judgment call and not just have an opinion. In this case, it is related to private equity in retirement portfolios. I already have my judgment call. I've thought through this in an organized way but some may call this an opinion. You have these opinion pieces, you know, if you think about an opinion, it's a personal belief or feeling or viewpoint that is not necessarily based on facts or evidence or organized thoughts. It is subject to a lot of interpretation. Whereas a judgment is more of an evaluative statement where a person forms an opinion based on reasoning, facts and weight of authority because they've done the work.

In this case, I'm going to argue that what we're going to talk about today when it comes to private equity as it relates to retirement portfolios is my judgment call on whether it should be in there. We're going to look at it from that perspective. And then we're also going to look at private equity from just simply the investment case or, against. And for that, we're going to bring in Peter Lazaroff, a good friend of mine, chief investment officer of plancorp, a very large advisory firm. He has conversations with senior leadership at Vanguard, which he's going to talk about in other places about these topics, and Peter has his own judgment about living in this space every day. So that's how we're going to approach the topic.

So, David is not sure whether he should do this private equity investment or not or does he need to do it, which was the way he phrased it at the end.

And so, David, here's a way to evaluate it. Now, obviously, I don't know the answer for you. You know, the $200,000 that you're talking about is 6.25% of your overall portfolio. Probably not enough to make a big difference one way or the other. But I want to give you a framework for how to think through these opportunities when they arise, and specifically to private equity.

So, my first question, or the question you should ask yourself, David, is did you start with a problem that you were trying to solve it with your advisor? Were you both, searching out of, hey, I need to get more return or I need more diversification, or I need an asset in my portfolio that has lower correlation to stocks and bonds? Was this a problem that you were trying to solve that led you to evaluate the possible solutions or investments that might address that? Then did you end up on private equity? Is that how you approached this topic?

Or did you approach the topic with the solution, hey, I got this. Private equity, it has all these great attributes. All the cool people are doing it. Did you lead with that, the solution, and then define the problem that it was solving. It's really important which way you address it. If you lead with the solution, well, we can rationalize or justify anything going back up the decision tree. A healthier way of approaching this topic with any kind of investment is I am trying to enhance my portfolio. This is what I'm trying to accomplish. Let me go find the possible investments in this case that might address this issue, opportunity or risk that I'm trying to solve, and then after evaluating them all, settling on the individual investment, in this case private equity. That's a logical way to think about it. If it's the other way around, I would be careful because once you find the solution, it's easy to justify it.

As you're evaluating the solution. We have to step back a moment and keep this simple. Elegant simplicity is our objective. Because retirement planning and portfolio management is not the point of all of this discussion. It's about you building a plan and an investment strategy that gives you confidence to live your life. So that means first is back to the pillars. Don't even think about private equity unless you have a vision for what you or you and your spouse want your retirement to look like. You didn't say your name, but I'm going to assume you're right at or in retirement and then organize your resources and know whether it's possible or not so you have a feasible plan of record, given the resources you have and all the uncertainty we face, and then do the work to make it resilient so you explicitly know how you're going to create your paycheck and pay for your life at least over the next five years, so you have some clarity and liquidity. If you haven't done those things in a very explicit way, I wouldn't even have this conversation about private equity. Private equity comes into play in optimization. The last pillar of optimization, which considers private equity is where I'm trying to improve everything by adding something that's outside of the normal. It's important when we think about optimizing our retirement plan is that literally, if you have a vision, a feasible plan, and a resilient plan, you could never do any optimization and be totally fine. You should feel confident that you can navigate life and try to get as much out and rock retirement. You don't even have to go down optimization tunnel or trail. You don't even have to. This is just a, maybe I do just to pick up pennies or whatever. It is important to know that you don't even have to do this if you have the other things in place. David, if you're evaluating private equity, Peter and I talk about this in our conversation, ask yourself, what am I trying to solve for here? What is the issue in the first place and how big of an issue is it? Dive deep down into what I really am trying to solve for. And then in your case, it's like six and a quarter percent you're looking at allocating it. Well, is that enough to even make a difference if there's an issue in the first place, or is this just something cool to do because all the cool kids are doing it? Likely it's the latter. To be honest with you, David, I don't know your situation, but in general, my judgment is almost nobody needs to really look at having private equity in their portfolio. It’s just not worth it. The juice isn’t worth the squeeze or the added complexity. That's my judgment.

If you're going to evaluate it, say, okay, if I do this private equity investment, what's the best case scenario? What if this thing's a home run and what impact does that have to my life? Next question is, well, if I do this private equity investment, what's the worst case scenario? Well, what if I lose the $200,000? That's the worst case. What's the impact to my life? And maybe there's none. And if there's none, then maybe it's just an intellectual exercise of I would love to play in that world and maybe hit a home run and I can afford a budget of $200,000 to go do that. If that's the case and it still doesn't impair your resilient plan and feasible plan, then that's just a stylistic. You want to go do that, and that's reasonable. I'm not saying don't do it, but it's not essential to do it in any way. So, if worst case is you lose all the money, then it's just a matter of whether or not Dave really wants to play in that world and have some access and maybe get a good story to tell or perhaps hit a home run or whatever it is. The other thing you want to consider, David, is the second order consequence of making an investment like that. If it's in an after tax account, you have different kinds of tax forms that come from private investments. Usually they're K1s, which always come late, so you may have to extend your taxes. Typically, there's limited liquidity, which means you won't be able to get the money out quickly. And in worst case scenario, and I've seen these, you could have a zombie portfolio where because everything goes sideways, they, they don't allow liquidity and you just have this thing sitting there for years and years and years. And then you have the fees that have to be overcome in order to get the, you know, the big return that or the benefit that they're marketing. Understand those second order consequences.

So, David, with it, respect to private equity, what category do you fit in is the answer is I don't know. But if you have an interest in this and you can do this without impairing your resilient and feasible plan, so you can go off and create a great life, which is the point of the exercise, and you're comfortable with the second order consequences of, hey, I might lose all this money and it might complicate my taxes, but I have enough of an interest and I'm willing to take a flyer which doesn't sound like from your last statement, because your last statement says, I haven't signed because I’m not sure if I need to commit that much to something new and possibly with more risk. That statement leads me to say, do you really need this? If you don't have that plan of record in an explicit nature with your advisor, then I would be cautious. So, my judgment call is, unless you are significantly overfunded and have an interest in private equity, I think it's not something that really anybody should consider seriously if they want to go create a great life. It just adds more complexity that's not needed and it likely won't solve even if you've defined what you're trying to solve for in the first place, because you're not going to use enough of a dose of it in order to get whatever benefit might be there. I just, I think there's too much other stuff to think about that's more important in creating a great retirement. I think this adds confusion rather than benefit to the whole retirement planning equation. I think we're going to see more and more private equity become a topic of what the cool kids are doing and why you need it.

There's an article in the Wall Street Journal. I'll end with this and we'll go to Peter, where the Wall Street Journal was talking about this and that private equity firms have been struggling because of all the deals they did before interest rates went up and they're looking for new sources of capital. Then coupled with regulatory easement, it's going downstream to retail investors. All the new cool kid advisors are going to have new cool kid things to talk about to try to put into portfolios. I don't think that serves our interest. I just don't. Peter has a quote at the end, and he goes off on a rant here and there because Peter's a very smart guy and talks from knowledge, but a rant at the end that I want to call out where he has a phrase when it comes to investing. He uses this as, like a mantra at his firm that he is known for. He says, “I'm more concerned with implementing a bad idea than missing out on a good one.” I would be very careful with private equity in a retirement portfolio.

With that said, let's go to Peter and just talk about the investment landscape, which is where he is an expert, to hear his judgment to help me lay the landscape for private equity and whether you should have that in a retirement portfolio. I thought I'd bring on a good friend. Not just because he's a good friend, but he's chief investment officer at plancorp, author of the book Making Money Simple.

INTERVIEW WITH PETER LAZAROFF

Roger: How are you doing, Peter?

Peter: Roger, thanks for having me. Since you mentioned the book, I'm in the process of writing my next book, which I'm pretty sure is called The Perfect Portfolio. But the publisher does get to have a final say before it goes live. But here's why I'm rambling about this.

Last time I was on the show, so many of your guests reached out to say positive things about the book. I still have a couple boxes I would love to clear out before the new book hits the shelves. If your listeners want to go toI will mail them a copy of Making money Simple, of $30 value. But ultimately, when I run out, I run out. if you end up getting this offer late, I'll find a way to make something cool up to you and get something that's worthwhile. But fair warning, once you ask for the book, you do get on. My email newsletter comes out every other Wednesday, so you're going to hear from me twice a month. But I promise I will make good use of the real estate in your inbox.

Roger: It's a very good book.

Peter, we were talking beforehand and you actually stuff the envelopes because I remember doing this with my book as well. We get an allotment of free books that we get to do whatever we want with.

Peter: Yeah, stuff. I could have somebody else do it, but I feel sort of bad although I also really enjoyed it. This is going to sound super weird. I love seeing all the different cities in zip codes. I know where Chicago is and Dallas is in New York, but there are just so many cities in our country. It reminds you how big of a world we live in. I really take a lot of enjoyment in seeing the names of places where people live. so yes, I'll be stuffing them myself. That means it will take a couple weeks to get it to you. But. peterlazaroff.com/freebook I'll get you a copy of Making Money Simple. You know, hopefully you'll see how important simplicity can be. You can put a lot of thought into your investments and the end product can be simple, but it can be so elegant for good reasons, which I think is pretty important for what we're talking about today.

Roger: You and I have an opinion on private equity and its role in individual portfolios. I think there's basis for it. So, I just want to explore that. Maybe you could call it a bias, but I think there's sound basis for it because you do this for a living and so do I. Let's start off with what exactly private equity is.

Peter: I feel like private equity is somewhat of a catch all term just used to describe an equity investment into a private company that is not publicly listed. And so typically you're seeing a PE firm acquire the entire company with the intent of actively running it. But there's actually a pretty wide range of private equity strategies and access points from venture capital to growth equity to buyout and special situations. And I don't think we have to get into the details of all those, but I do think it's important that when we talk about private equity and we know how important diversification is, private equity is a pretty big space and can mean a lot of different things. When people are pitched private equity, it's not always the same thing that, you know, your friend or neighbor or golf buddy or reading book partner would, would hear from.

Roger: It's like the junk drawer of a certain category. So, alternative investments, not, not junk in actual junk, but it could be a lot of different things.

Peter: Yeah, absolutely.

Roger: So, let's start with traditionally who is invested in private equity.

Peter: Well, traditionally this was an institutional asset class made really popular by endowments like Yale. David Swinson for example, is considered to be the father of the endowment model now. David Swinson has some really important work in that space. But he has also wrote, written a book for individual investors where he makes it abundantly clear that individual investors should not be doing these things because some of the advantages that a Yale has, for example, have to do with the fact that they are a perpetual entity and that they have capital that these fund companies want. So, Roger, you and I could have a perfect crystal ball and know who the best private equity manager is going to be and we could go try to give them our money and they wouldn't take it because they don't want our money, they don't want Morgan Stanley's money, they don't want Mercer or any of these consultants money. The point being, they want Yale's money, so Yale gets lower cost, they can negotiate terms, they get different liquidity requirements. Historically they're really big institutions who don't require the type of liquidity that the average person who's saving for retirement or living in retirement needs, so you can lock out your money for a decade or more and they don't really care what the quarter to quarter returns are and they don't really need to access it and in addition to that, when you're a Yale or a foundation, you have, like you said, you're indefinite in terms of your timeframe and you have cash flows in terms of donations and money coming into it that you're constantly trying to allocate. Return maximization is not even the goal. I mean, some of it is asset liability management.

So, I think one thing that people misunderstand, particularly about a university endowment, is that they are truly trying to maximize the amount of return for the amount of risk they're taking, which a lot of people talk about. But you, you can't take that to an extreme when saving for retirement because sometimes that means you won't earn a high enough return to make it to the finish line. And so, there's the, the objectives are very, very different and I think what has been interesting is private equity in particular wasn't a very large space 20 years ago, but now there are thousands of managers. It used to be a very small group of people who could add a lot of value by buying a private company, enhancing its operations candidly, using a lot of debt. You know, a Lot of leverage in a historically low interest rate period and turning that into a profitable situation. But as you know, Wall Street as a whole is looking for new revenues. I think in that period when private equity became popular for institutions, we, I'll say the royal. We started becoming abundantly clear that traditional active management doesn't work and it's high. Wall street lost a lot of revenue from that. To me, a lot of what brings Wall street firms and brings financial firms in, even financial advisors to push private equity these days is that it is a new avenue for fees.

Roger: At a moment here, I think Peter, where the advisors have to justify their fees to clients. And if you're passive and you're not doing serious planning, you have to have something that is unique. And there's an article, I don't know if you saw it, Peter, in the Wall Street Journal just the other day talking about the state of private equity and how they're struggling right now to raise money. And the main reason is they had a lot of investments prior to the interest rate increase, which has put them into management mode of just trying to keep the current deals working because they were all priced when they did them at low interest rates. And now the interest rate environment has changed, which is now they're just working through deals rather than raising money and they're looking for new sources of capital. And that's coinciding with an ease of regulatory hurdles in order to sell it to the public.

Peter: That's beautifully said and I think I'll make a, what I'm going to try to make a nonpolitical statement here. But with the current administration it is widely expected that the Department of Labor is going to allow private equity into retirement plans, for example. I've had conversations. So, one of the benefits at PlanCorps that I have, and one of my favorite parts of my job is getting access to people at asset management firms. When I talk to leadership at Vanguard, they're saying there's an extremely good chance that private equity is going to be rolled out in Vanguard target retirement funds. Now think about that for a second because when you hear that and you aren't that plugged into the how things work in the financial, not just markets, but the profession is that might be seen as a sign, as Vanguard's stamp of approval that people need this and that it has a place in your portfolio. But in reality, when you talk to leadership, it's more about trying to maintain market share than it is about a necessity.

I think we're going to get to a point where this is going to become harder and harder because as you said, advisors are pitching it because it shows value, or at least they think it does. And then you have Vanguard adding it to target date funds. And I wouldn't be surprised, based on the conversations I have, if Vanguard doesn't roll out a private credit or a private equity fund to some segment of their client base. They already sort of have something for their high net worth, ultra-high net worth personal advisor service clients. But it's complicated and I think you have friends who talk about it and it seems like there's a decent narrative around it. There's a narrative that makes sense, but is it necessary?

I will be honest, Roger. So, at PlanCorps, we have an alternatives allocation for our family office clients. So, most of our clients are in like the 2 to $10 million range. But when you get over $20 million, you start working with our family office. Our family office has an average net worth of $125 million. We have built out something exclusively for them. But my enthusiasm for it is limited at best. I think in general I can be convinced that there is a case for this to diversify. I can be convinced that you can do this in a manner that isn't necessarily harmful. But when it comes to return enhancement, that's highly uncertain. You look at all the managers on the spectrum, like the top 25% of funds do okay, but the other 75% do really poorly. And it's not like this traditional active versus passive debate or studies that we see, like Spiva, the S and P index versus active scorecard comes out twice a year and people see, oh, like the middle of the pack manager didn't do great, and that's bad. But like, no, no, no. The second quartile of managers, which is above average, do terribly in this space. And so how do you prevent yourself? You know, not everybody can have the top 25% managers. It's just not possible. Advisors are saying, well, we have all these people researching it. Look, it's, it's, it's active management in a different wrapper. It's very, very difficult. The expectations for this space need to be extremely reasonable. After that you have to really know why, like, why do you have it in your portfolio?

Roger: As you said, the second quartile is miserable relative to others. Then we're worried about who's going to be the winner next, who's going to be on the streak next, which is difficult to predict. Then another argument is the diversification in that it's a lower correlation relative to, say, in, you know, public equities rather than private equities.

From my research, and I'd be interested in your perspective, my understanding is that, well, potentially there's some diversification and that it's lower correlation. But if you really look at the numbers, generally they don't price to market every day. So, there's how they price. Their portfolio can be nuanced. Secondly, when markets are under stress, private equity correlations go a lot higher and act like equities right when you need the low correlation most. So, it's maybe an argument, but not a compelling one.

Peter: Yet you hit the nail on the head there that a lot of the correlation benefit comes from the fact that they don't price every single day. And just to take it one step higher level, so think about your ETF. Even bond ETFs, which are bonds, are hard to price every day. Bond ETFs have actually done wonders for the bond market in giving us a price mechanism. But when you think about the companies or the entities that are owned in a private equity wrapper, these are things that pricing every day doesn't even make sense, and so they don't. There are some newer vehicles that are priced more frequently. But ultimately a lot of the diversification benefit is less robust because it's not pricing every day. And as you mentioned, Roger, when things go bad, all correlations go to one is what people say, which is just a simple way of saying that like all assets sort of fall in a crisis, there'll be one random winner. Look, there'll be all sorts of fun launches based on that one random winning, asset class. That's where I mean, private equity. That's a lot of what happened. The tech bubble burst in private equity and hedge funds looked really good. The financial crisis showed how powerful, you know, I guess it was really hedge funds during the tech bubble that burst and did really well. And private equity sort of really had its strong moment in the sun during the financial crisis bust. And that's sort of what happens right now. We're seeing private credit be the like it girl of asset classes, and so much money flows into these things. It's cyclical in that nature.

Roger: Let's move to the fee structure and whether that sets you up for success or not. If I'm going to Invest in private equity in some way. What's the normal structure from a fee perspective?

Peter: Well, so historically when you are making a direct commitment to a fund, meaning, so there's general partners and you become a limited partner and you say, hey, I'm going to commit a million dollars and you don't even really write the check right away. They just call it, you know, they call portions of that money as they need to use it. The historical and common amount you hear is 2% fee and 20% performance fee. So, it's a pretty high fee. Look, high fees don't have to be bad. If you're adding something of value.

For example, emerging market stocks cost more to buy than the S&P 500. That's fine because it costs more to trade those. It is fine that private equity costs more than public equity. What you will typically see are fees, you know, in these semi liquid vehicles today, between like one and a half and 2%. I mean you can see things higher for sure. I think that's actually Roger, one of the most interesting things about the space. From an asset allocation perspective, we know that every dollar you pay in fund fees is a reduction in a dollar of return. And there are things that I dislike about the space as a whole. But a really interesting thought experiment is what if it was free? If the space was free, how would it change its ability to be a return enhancer, its ability to be a diversifier? And it would change it. but the problem is it's not free. And that's a big problem I have. And you have to pay people who are running the underlying funds. And these are. It's expensive to buy out a company and run it. The type of talent that you have to hire and maintain to do research and manage the company is expensive. So, I'm not saying the fees are too high. I'm just saying that it sets a higher bar that you have to clear to succeed.

Roger: Now I have some personal investments in private companies.

Peter: Me too. Our own firms.

Roger: Our own firms. That's my biggest investment. Right.

Peter: I think. Is that what you were thinking?

Roger: That is not what I was thinking.

Peter: Okay.

Roger: Other ones. But yeah, that's a big one and has an attribute attached that it is illiquid. It's a one way street.

Peter: So traditional private equity is a one way street. You don't know when the exit might happen, what the exit might look like, or whether they'll even be a capital call for asking for m more money because they're navigating a situation. Now that's traditional private equity. I don't know to what extent the products nowadays selling to individual consumers maintain that illiquid aspect of it. Imagine a good portion of them.

Roger: How important is that? Sometimes that's a feature, not a negative.

Peter: You know, the part of it that's a feature is that when you can't access your money, even if you want to behave badly in markets, you can't. Look, there's definitely some evidence of that. There is no empirically published research that shows that you know definitively that that is true. But anecdotally I would say in my own experience that it's true.

What most people are getting pitched today is less so these direct investments where you're committing a certain amount of capital and having that capital called over time. What you're seeing more often these days are these semi liquid funds that offer you liquidity windows, maybe quarterly. There are limitations, they can say, look, no withdrawals, it's too distressing of a market. We've actually seen that in private real estate a few times.

Roger: I have that right now with something that they suspended their tender offer, which is essentially liquidity. I think it's been suspended for over a decade.

Peter: Well, that's a long time.

Roger: That's a long time.

Peter: That's all in the paperwork that you sign that you're at risk. You know, you have to be ready not to see this money for a long period of time. And I think the liquidity piece, when you think of building out a portfolio that is supposed to make, you know, in the accumulation phase, like when you're saving for retirement, I mean, it's actually, I don't think there's really any debate on how to do it. You maximize your tax deferred accounts, you save regularly, you invest that money. Like accumulation is actually really easy. It's not a puzzle anymore. Decumulation is difficult. There is not a one size that fits all answers to it. you also ought to be trying to maximize your own personal happiness, not just your portfolio. And that requires a lot of different things. And when you lock up a portion of your portfolio, it does make it more difficult to live a life that you've thoughtfully designed. It doesn't make it impossible. But consider, for example, like a Roth account. If you have a whole bunch of different accounts and you know that you're not going to spend the money in your Roth account because you want your kids to inherit it. So, it's going to be the last bucket you tap when you access something like private equity or any sort of alternative with a lockup you've created a similar restriction but without necessarily the same virtue behind it or same sort of why. I said earlier, the why behind doing this. It takes when you ask a few whys, like well I don't know what it is, what's it like, the three levels of why, the seven levels of why. If you ask why enough to this, you're going to talk yourself out of it.

Roger: Int that's key there. It's not good or bad. This sounds like we don't like it.

Peter: I mean I don't love it. I don't mind saying that I don't love it.

Roger: But it's what you are trying to solve for by using it? Then re asking that a few times, what exactly am I trying to accomplish here?

Peter: Right? Exactly, exactly.

Roger: Yeah.

Peter: It's a good exercise I think when you have a financial advisor, you're working with someone like Roger myself, we're going to do that. When you're on your own, it's more difficult and I got to be honest, I don't know how difficult it is to access one of these sorts of newer semi liquid products if you're managing money on your own. But I do know in like some of the mega advisor world where everything's pretty standardized offering you've advisors saying you should put $300,000 in this or a million dollars in that and you don't really know why.

There are compelling narratives. They'll say, well look, not as many companies are going public anymore as they used to. That is a fact, Roger. But does it actually matter? Does that change the fact that when we're investing, we're just trying to outpace inflation without taking undue risk and the long term historical return on global equities, the real return so after inflation is about 7%. There's no evidence that would suggest that because fewer companies are going public that that's an issue because only a handful of companies drive all the returns anyways. 90 companies going back to 1926, this is such a crazy stat. And there's an economic paper that I can give you a link to put in the show notes if you want. But 90 companies since 1926 make up for half of all of the return of the S&P 500. So not every company has to go public. I mean think about Nvidia, which has just exploded and added all sorts of returns in the last few years. That one stat people show.

Actually, Roger, you and I are in a group chat where someone showed that chart. I'm like, oh, no, don't show me that chart. Because it's true. It's a compelling narrative. But when you have an advisor or a salesperson pushing factual narratives, you really do have to ask, why is it important? Because it's not that they're lying. I'm just saying I don't think it's relevant.

Roger: I'm totally agree with you. I'm thinking about that stat at the moment. I'm also thinking about what the thing that spurred this for me. And I don't like mentioning names usually, but there's a book called, the Holy Grail of Investing that is all about the case for private equity and how institutions and endowments have done so well with it. You can, too, which misses the point of what you are trying to accomplish in your life? Does it play a role? Which is really the most important question.

Peter: I could not agree more. And I think when you, especially authors whose business is selling their brand, are pushing a certain product or idea, I mean, naturally you have a smart audience. I hope they understand that there's conflict all over that. And it's not that this stuff is bad or not. If I won the lottery, for example, here's an interesting. Because I've made it clear I don't love this stuff. If I won after tax $100 million today, I would not have an allocation to private investments. I would not. However, in my extra time, because I now have $100 million after tax, I could see myself, like, if something came across and sounded interesting to me, I might do it sort of the way that I see a lot of our clients sometimes want to buy some shares of Amazon or want to buy some shares of Nvidia or Meta or whatever. That's sort of where I would personally see myself doing it again, because I might find it interesting. And I'm like, oh, that's a good idea. And it wouldn't be because I want to make a ton of money or diversify my portfolio. At that point, I would be overweight. Liquidity. $100 million in my bank account means I have way too much liquidity. I do not need it. I'm not maximizing anything. Like, I got everything I need. This is now just interesting to me.

Roger: That is actually the key. This is I want to express an interest or invest in an idea that I find compelling. But it's. It's the excess wealth that we're talking about. It's the money you take to Vegas or to the golf course in your case and lose.

Peter: Now, you know what's interesting, Roger, I’m assuming you have this happen. You talk to people with all different levels of wealth, and somebody who has $5 million might be insulted when I say you don't have enough wealth to consider this. And with a $5 million. Let me just kind of do the quick math. At $5 million, if I need, say, 20% allocation to make an alt a good diversified private allocation, that means you need $1 million locked up in this private stuff. And you have got to spread it across maybe eight managers to be really diversified. Because remember, these are actively managed portfolios. They're not like private equity across the whole country. They're making a single thesis or maybe a few thesis theses. There we go investing in a couple companies, it's very undiversified as a single holding. To get enough diversification, you have to have some real capital there. Why would you need 20%? Well, if you're not doing 20%, you're just window dressing stuff. I’m skipping over a lot of the math behind why.

But, like, as someone who's an asset allocator, and that's all I really do, if you have a 10% allocation of something, you're not even really doing anything other than creating headaches during tax season. So, at $5 million, I'll tell people, you don't have enough, and you kind of get into the why. At 20 million, you start to have enough where you can do it, logistically it's feasible, but you still get back to the why. Like, why do you want to do it? I think it's interesting, some people who have 20 or $30 million feel like they have no wealth, and someone $5 million get offended when I say that.

In reality, you know, I already mentioned we have this for our clients, and we are talking about the why, it always comes down to something interesting, which is that they are overweight. Liquidity. I love using that phrase, even though some people don't know what I'm talking about. But, like, when you go back to my $100 million lottery, I don't need $100 million. I have too much weight of my net worth in liquidity, whereas today, because I don't have a hundred billion dollars. I have a private company that's the registered investment advisor that I'm a partial owner of. I have my home. You know, those aren't liquid things, but I all my retirement savings are in highly liquid stock. So, all my cash savings are highly liquid. At the end of the day, I think when you think about the why and who this is for, you know, it starts to narrow when it actually makes sense. I'm sort of going back to something I said. None of the reasons that support private investments are reasons that would prevent your traditional public stock and bond portfolio from delivering the long term historical returns that they have in the past. With one caveat, a lot of people say the next decade returns are going to be lower. Fine. If you only have a decade to live, hopefully some of the money is for somebody else. And then your time horizon is now suddenly more than a decade. If you're planning to spend the last dollar on your death, then yes, you have a decade left. But we can't predict when a bad decade of returns is going to come. You know, the U.S. maybe they will. That's why you own international stocks. You know, there's things around this. Bond yields are higher now. Now I'm off. Now I'm ranting.

Roger, I appreciate you sharing your perspective on investing. I'm trying to take after you, Roger.

Roger: Wait a second here. That was the perspective I was hoping to get from you, which I think you delivered, is that you're a chief investment officer of a very large advisory firm. You think about this stuff, you research this stuff, so you have a perspective that needs to be heard. I appreciate you sharing your perspective. You have a judgment call. I don't really like this stuff. I think that's reasonable and I want to thank you so much for sharing that.

Peter: Yeah, Roger, I think in general, I’ll leave your listeners with one last thought. It's sort of like the FDA. When they approve a drug, they're trying to approve something that's going to help everybody out with minimal side effects. And they do all this testing and sometimes you don't approve a drug that man might really help the population, but the side effects are just too bad. And other times you might accidentally prove something where the side affects you didn't realize they were as bad as you thought. And in statistics for any of you that had it, they call that type 1 and type 2 error. And in investing, you have to make that trade off. And I am More concerned about implementing a bad idea than missing out on a good one. And that is the framework through which I see the investment universe. We all have the same data set. It isn't always black and white. It's shades of gray. And I think that this is a place that when you see a vanguard of the world putting this in your target date fund, something that I really think might happen in the next 12 months, I hope that you all take a moment to try to really understand what's going on at Vanguard, that $10 trillion asset management firm that is very big and has a lot of different things going on beyond their target date funds that they have to worry about. I think you need to really carefully think about, do I need this? If you happen to own a Vanguard target date retirement fund that ends up getting this, fine. I still don't know that you need to go out of your way and actively seek out this exposure in order to meet your goals.

Roger: Thanks, Peter.

Peter: My pleasure. Thanks for having me.

TODAY’S SMART SPRINT SEGMENT

Roger: On your marks, get set, and we're off to set a little baby step we can take in the next seven days to not just rock retirement, but rock life.

Okay, in the next seven days, take a moment and remind yourself of the purpose of retirement planning, which is to create a great life. Yes, we want to pick up nickels and dimes where we can have them. But don't make your process in your portfolio more complicated than it needs to be. It'll only distract you from the true goal, which is creating a great life. So do some self-evaluation there about what the real goal is.

BONUS

Mission number 25 and 26 for Zigman Canceller, my grandfather, that he flew in World War II in B-17s in Europe.

“Mission number 25 and 26, August 7th, 1944. Ship number 274, sortie 17th went to Bletchhammer, Germany today and bombed an oil refinery. Flak heavy, intense and accurate. Seen enemy fighters, never a dull moment. Escorts were P-51s and 38s, carrying 16250 pound bombs. Mission 8 hours and 30 minutes. Altitude 26,800ft.”

His objective was very simple, get back alive. Our objective is very simple in retirement, to feel empowered so we can go off and live a great life.

The opinions voiced in this podcast are for general information only and not intended to provide specific advice or recommendations for any individual. All, performance reference is historical and does not guarantee future results. All indices are unmanaged and cannot be invested in directly. Make sure you consult your legal, tax or financial advisor before making any decisions.