Peter Lazaroff, Chief Investment Officer at PlanCorp and author of "Making Money Simple", joins to discuss the complexities of adding private equity to retirement portfolios. They explore essential factors like having a solid financial plan and clear retirement goals. Peter explains what private equity is and highlights its potential risks and costs. The conversation emphasizes the need for careful evaluation, cautioning against following trendy investments that may not suit individual strategies. Tune in for a clearer understanding of these investment dynamics!
Investors should prioritize a clear understanding of their retirement goals before considering the complexities of private equity investments.
The potential benefits of private equity must be carefully weighed against its risks and high fee structures, emphasizing the need for informed decision-making.
Deep dives
Evaluating Private Equity for Retirement Portfolios
The discussion about whether to include private equity in retirement portfolios centers on its complexity and potential risks. It's essential for investors like David to start with a clear assessment of their financial goals and whether private equity addresses a specific need within their portfolio. Investors should approach private equity not as a solution but as a potential option in the context of defined investment objectives. Making a commitment of $200,000 without a comprehensive understanding of its impact could lead to unnecessary complications in one's financial strategy.
Understanding the Role of Advisory Recommendations
Investors must critically assess the advice provided by financial advisors regarding private equity, especially when the motivations behind such recommendations are examined. Historically, private equity investments have catered to institutional investors who can withstand long lock-up periods and often achieve superior terms due to their larger capital commitments. As private equity becomes more mainstream, driven by advisors seeking new fee opportunities, investors should question the necessity and alignment of such investments with their personal goals. Knowing who truly benefits from these investments—advisors or clients—will help investors make informed decisions.
The Realistic Benefits and Challenges of Private Equity
The potential benefits of private equity, including diversification and return enhancement, must be weighed against inherent risks and complexities. While diversified exposure to private equity can theoretically lower overall portfolio risk, historical performance indicates that a significant number of funds underperform compared to public equity markets. Additionally, the fee structures associated with private equity investments are often high, which can eat into any perceived returns, making the exercise of investing potentially counterproductive. Investors should carefully examine what they aim to achieve with private equity before committing capital, particularly if they lack the financial cushion to absorb possible losses.
The Importance of Simplicity in Retirement Planning
The conversation points out that retirement planning should prioritize simplicity over the allure of trendy investment opportunities like private equity. Complexity in investment strategies can divert attention from the fundamental goal of retirement planning, which is to lead a fulfilling life. Investors are encouraged to have a clear vision for their retirement and build a resilient financial plan, allowing them to make informed decisions without succumbing to market fads. Ultimately, maintaining elegant simplicity can lead to greater confidence in navigating retirement, rather than getting bogged down in potentially unnecessary and complicated investment options.
In this episode, we tackle the complexities surrounding private equity in retirement portfolios. Join Roger as he navigates a listener's inquiry about the necessity and implications of investing in private equity, especially in light of recent discussions and literature on the topic. With insights from investment expert Peter Lazaroff, we explore the pros and cons, the importance of having a solid retirement plan, and whether private equity is truly a beneficial addition to your portfolio. Tune in to gain clarity and confidence in your retirement investment strategy!
OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN
(00:00) Complexity is your enemy. Any fool can make something complicated. It is hard to keep things simple.-Richard Branson
(00:38) Today’s episode is about private equity.
(01:33) Roger reads an email from listener Dave with a question about investing in private equity.
(02:28) Roger says that this episode features his opinion and judgment on private equity.
(06:45) Don't think about private equity until you have a vision for what you want your retirement to look like.
(10:20) Consider the second order consequence of making an investment.
(12:00) Unless you are significantly overfunded and have an interest in private equity- Roger thinks private equity is unnecessary for creating a great life.
INTERVIEW WITH PETER LAZAROFF
(14:10) Introduction of Peter Lazaroff, author of Making Money Simple
(16:39) What is private equity?
(17:38) Who is traditionally invested in private equity?
(26:12) When markets are under stress, private equity correlations go a lot higher.
(27:49) What is the normal fee structure for investing in private equity?
(31:15) What you're seeing more often these days are semi-liquid funds that offer liquidity windows.
(34:30) There is no evidence to suggest that fewer companies going public is causing an issue.
(40:15) We can’t predict when a bad decade of returns is going to come.
(41:35) Peter: I am more concerned about implementing a bad idea than missing out on a good one.
SMART SPRINT
(42:39) In the next seven days, take a moment and remind yourself of the purpose of retirement planning which is to create a great life.
BONUS
(43:20) Roger reads an excerpt from his grandfather's WWII journal.