Why Your Retirement Comes at a Disadvantage
(Bloomberg Opinion) -- Many of us thought the Covid-19 pandemic would have led to financial market meltdowns, but we were so wrong. After a year of lockdowns, with nowhere to go and spend money, we saved and invested so much many might feel a step closer to retirement.
Let me be frank with you: That absolute figure in your 401(K) account is misleading. An inflation in asset prices will only propel a rise of the cost of living, especially in non-essential items. Restaurant bills will appear bigger, so are your summer car rentals and private school tuitions. Instead, we need to benchmark our portfolios against how others are doing — just to make sure our purchasing power isn’t eroding.
For those of us who aspire to financial independence, the picture is not pretty. Has your retirement account risen by 8.3%? That’s how much global wealth — including stocks, bonds and real estate — grew in the last year, to a record $250 trillion, according to Boston Consulting Group Inc. And that 8.3% is just a minimal point of comparison. In 2020, the ultra rich — defined by the consultancy as those with at least $100 million — saw their investable wealth soar 15.8% to $5.8 trillion in the U.S., and 26.5% to $3.6 trillion in mainland China. This exclusive club of 60,000 people have $22 trillion in investable wealth, representing 15% of the world’s total.
Granted, rich people may be rich because they are better at managing money. That’s fair. But there’s also something unfair about it. Do all of us have the same access to the asset classes that the extremely well-to-do have? The glaring answer is no.
Let’s look at private markets, which include growth equity, venture capital and private debt. They are super trendy, soaring to $7 trillion in assets last year, according to Morgan Stanley. Fearful of lofty stock market valuations, which dim the prospect of future returns, even top-tier hedge funds are entering private markets and investing in late-stage unicorns.
This is a corner of the global wealth almost entirely out of reach of Main Street. About 90% of that wealth is held by institutional investors and people with over $50 million in investable wealth, according to Morgan Stanley.
There are moves to make the access more universal. An agreement last summer between the private equity industry and the U.S. Labor Department effectively allowed 401(k) plans to invest in buyout firms. By 2025, defined contribution 401(k) plans could conceivably allocate 4%-5% of their assets under management to private markets, estimates Morgan Stanley. That’s nothing: The ultra wealthy already have 11%-13% allocation now. Granted, defined benefit pension funds are big players in private markets, but for those of us working in the private sector, defined benefit plans have become very rare. You have to work for the government to get that kind of exposure.
Wealth includes not only bonds and stocks, but also real assets, such as property, which accounts for roughly half of global wealth, according to BCG. And even here, access is not even. These days, you have to be cash rich to become house proud in the sizzling hot residential real estate market. In April, half of existing-home buyers in the U.S. who took out mortgages coughed up at least 20% in down payments. If you couldn’t afford that kind of upfront cost and have to rely on insurance from the Federal Housing Administration… well, you probably don’t own a house and aren’t taking advantage of a ramp-up in property values. The National Association of Realtors said Tuesday that median existing-home sale prices in the U.S. rose above $350,000 for the first time last month.
And how about alternative assets, such as cryptocurrencies? Family offices and high net-worth individuals are already the main patrons of the $3.8 billion crypto hedge fund industry.
In July, only a minuscule group of workers could invest a tiny portion of their 401(k) contributions in Bitcoin, Ether, and other cryptos. ForUsAll, a 401(k) provider, offers it, but with just $1.7 billion in retirement plan assets, it is almost negligible in the $22 trillion retirement account market. Meanwhile, the Securities and Exchange Commission once again delayed its decision to approve a Bitcoin ETF. By comparison, Canada already has four Bitcoin and four Ethereum ETFs trading on its exchanges.
Arguably, the middle class can get indirect exposure to these kinds of elite investments. Instead of being a private equity investor, one could buy the shares of Blackstone Group Inc., or Apollo Global Management Inc. Similarly, those of us who are not tech-savvy enough to trade on crypto exchanges can buy stocks that act like a leveraged Bitcoin ETF, such as MicroStrategy Inc., a software maker that issued bonds to buy Bitcoin. For their retirement accounts, many investors also went for Grayscale Bitcoin Trust, a private trust with $29 billion in net asset value.
But why do retail investors have to pursue indirect, less-efficient ways to access private markets, when the ultra rich can buy everything they want? For instance, because of the structure of the Grayscale trust, it can’t behave like an ETF, creating and redeeming shares to adjust to demand and keep its price in line with its net asset value. On May 12, its investors were able to sell their holdings only at the equivalent of $43,272 per Bitcoin, when the market price was $54,430, data compiled by Bloomberg Intelligence show. The ultra rich can tell their crypto fund managers to sell at market price.
We may not all have the same tolerance for some of these risky investments but we should not be prevented from putting our money in them. That’s undemocratic.
This year, we witnessed quite a few bit of market anomalies beyond the meteoric rise and fall of cryptocurrencies, such as the meme stock mania that empowered retail investors. It’s easy to blame the tech-savvy millennials and Generation Z for the latest crazes. But why shouldn’t the young and ambitious not try to keep up with the rich? Especially when they see the wealthy earn double-digit portfolio returns and super yacht sales are hitting record highs. The rest of us can only hope to host yard sales now and then — and to retire much later. We’re living longer anyhow. It’ll give us time to labor away.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
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