Investing in a World of Changing Interest Rates: Tips for Asset Allocation
Key Takeaways
In a volatile (and unpredictable) environment, there is a dangerous knee-jerk reaction to move to cash for “safety”
Real safety comes from identifying opportunities that reduce volatility while maintaining desirable returns
These opportunities can be found in unexpected places
Introduction
Serious investors often need to dig deeper than the surface observations about the current market environment and study the less more complicated nuances. So let’s begin with one that few will contest: we’re in a rising interest rate environment, evidenced by ten interest rate hikes by the Fed since March 2022 (their recent decision to “pause” such hikes notwithstanding).1
For the first time in recent memory, investors can park cash in short-duration money market instruments that yield more than 4%, while waiting for more attractive options for their capital.
But is a move to cash always the best move?
With the trailing rate of inflation well north of 4%, investors know well to differentiate between nominal and real rates of return. Once we adjust for the rate of inflation, as well as taxes, what appears at first blush to be a risk-free return of 4% or more instead becomes a negative real rate of return.
Instead, investors looking for positive real rates of return should consider opportunities that exploit market inefficiencies. In a market of surprise ups and downs and moving interest rates, reducing volatility while still producing positive returns is a worthy goal for any portfolio.
Source for chart data: Aswath Damodaran, Market on Musings Substack
Real Estate? In a Rising Interest Rate Environment?
Sebastian Rivas, founder and CEO of Andes STR, spoke recently about the perceived efficiency of the real estate market. His firm exploits existing inefficiencies by deploying machine learning to specifically analyze short-term rental opportunities within the wider investment real estate market. High interest rates may be bad for investment real estate, and rising interest rates may be even worse, but volatile or unpredictable rates represent the largest risk of all, since it is nearly impossible to project where we’ll be five years from now.
In such environments, investors could pivot away from long-term rentals, which are more suitable in a stable interest rate environment, and towards short-term rentals, which can better exploit shifting interest rate conditions. Andes STR assists such investors by moving beyond traditional metrics, such as square feet, or number of bedrooms or bathrooms, using less conventional metrics to arrive at a reasonable valuation for a short-term rental. While these better-known metrics may indeed be determinative in a long-term rental market, multiple other factors come into play when the same property is considered as a short-term rental.
Case Study: Orlando
Consider a market like Orlando, where short-term rentals are influenced not merely by how many bedrooms or square feet they contain, but whether there is a pool on the property, or a large-screen TV. And in a location whose short-term rentals are dominated by visitors to Disney World, the driving distance to Disney (especially at peak travel times) has proven to be a significant factor in assigning value to a rental property.
Unicorn Investing? To Reduce Volatility?
In much the same way, Nikkl employs a different spin on providing access to today’s unicorns that are positioned to be tomorrow’s growth technology leaders. Early stage technology investing in 2023 requires a different approach from what was the norm 20 or 40 years ago, when today’s titans such as Apple, Nvidia, or Google became public with more than much of their growth still ahead of them.2,3 (Consider, for example, Apple’s valuation of $1.8 billion at its December 1980 IPO, at $22 a share…ten cents a share, split-adjusted. With a recent share price of $188, it is now worth just shy of $3 trillion.) Today’s IPOs debut with multi-billion-dollar valuations or more, and therefore early investors have already benefited from a significant portion of the growth, and hence capital gains and resulting investment profits. As a result, pre-IPO access to unicorns, unlike a generation ago, is necessary to have the possibility of such parabolic returns.
Of course, to have such access, you have to be a limited partner of one of only about a dozen or so global investors that have consistent access to a wide range of unicorn investment opportunities.
Inspired by research at the Stanford Rock Center for Corporate Governance, Nikkl invented a better way to access investment opportunities in “unicorn” companies. Nikkl’s fully-compliant approach provides risk-adjusted returns for investors, liquidity for employees and cash on unicorn balance sheets.
Of course, no one would suggest that unicorns make up the bulk of your portfolio, but in the search for risk-adjusted returns, allocation to many different sectors, including traditionally perceived “high-risk” areas such as unicorn investing and real estate, is a critical component of a portfolio structured to perform well despite the market’s twists and turns.
Get a deeper dive on investing in a world of changing interest rates
Listen to this recent webinar, featuring Sebastian Rivas and Dan Siciliano.
Schedule an appointment for a free individual consultation to learn about how you can invest in pre-IPO unicorns.
Join the Nikkl unicorn investing mailing list to keep abreast of the latest happenings in this evolving market; you’ll stay up-to-speed with the latest webinars and blog posts.
Footnotes
https://www.thestreet.com/apple/stock/1980-to-now-the-journey-of-apples-market-cap
https://www.edn.com/apple-ipo-makes-instant-millionaires-december-12-1980/
Disclaimer
The information provided in this article is for general informational purposes only; it is not investment, financial, legal, or tax advice, nor does it constitute an offer or solicitation for the purchase or sale of any securities or a recommendation for any investment product. The article does not take into account your personal financial situation or investment objectives, and therefore you should not rely on this article. Before making any investment decisions, we strongly recommend that you seek professional financial advice from a qualified advisor who can assess your specific financial situation and provide personalized recommendations. The company disclaims any and all liability for any actions taken based on the information provided in this article.
