Look to the right for a fantastic chart that tracks investment returns for various asset classes over the past 10 and 20 years.
A few points immediately jump off the page:
- Angel Investing Outpaced All Other Asset Classes. Obviously, at the top of the list is the gigantic gap between returns for angel, or early-stage private company investing, and all other asset classes. I will elaborate on this more below.
- Gold Had a Very Good Decade. While I personally loathe gold as an investment (see my blog post from last month - "Gold is great - But It Is Not an Investment"), for better or for worse the "00's" were a very good decade for gold. Though I must add that gold's investment return since 1980, on an inflation-adjusted basis, is actually NEGATIVE.
- Inflation Was Consistently Low. Inflation has been relatively consistent for the last 20 years, in the 2 and 1/2 percent annually range.
- The Stock Market Performed Awful. As discussed in my worst investing decade ever post last month, the U.S. stock market - the Dow Jones, the S & P, the NASDAQ - had a historically abysmal decade, with all major indices posting both real and inflation-adjusted NEGATIVE returns (first time that has EVER happened).
- Real Estate - Same Old, Same Old. The great real estate collapse of 2007-2009 brought the decade's real estate returns into its long-term historical average, about 1% ahead of the rate of inflation.
So that is past. What will the next 10 years hold? Here are three predictions:
- Cash is VERY Dangerous. Not shown on the chart but of interest is today's average money market fund yield of a comically bad 0.03% (that is $3/year of interest per $1,000 invested). When viewed against either the current inflation number (1.8%) or the massive risk of long-term inflation brought on by the unprecedented federal budget deficits, dollar-denominated cash deposits today offer a downwright frightening risk-reward ratio.
- Only By Blind Luck Can One Expect To Beat the Averages in Public Stocks. The dirty little secret that the mutual fund and brokerage industry wants to hide is that there has been no scientifically valid study in the last 20 years that has demonstrated an actively managed stock portfolio offering better risk-return than simple index investing. And as global trading and real-time information-sharing continues to intensify, expect this trend to deepen. So for better or for worse if you're invested in U.S. public stocks in the decade to come, by far your most likely outcome is the market average.
- Angel Investing Returns - Too Good To Be True? Now the 1st line in the chart, showing 10 year angel investing returns of over 30% annually, just feels way, way too high. How on earth could any asset class so outperform all others over such an extended period of time? And more importantly can and will it continue?
My answer - yes but. Yes - because the 2 key factors that drive angel investing outperformance remain the same. One, returns have to be very high as compensation for illiquidity - most angel investments are in private-held, small companies years away from a sale or an IPO. And two, returns are high as compensation for the EXTREME variance of the asset class.
Now for the but. While the asset class returned an average of 30%+, it was attained via the sum of a very, very few winners (aka Google), and lots and lots of losers.
Quite simply, a few investors made a killing, and a giant many got killed.
But here is where it gets interesting. The one thing that has and will continue to drive angel investing returns - namely technology advancements - now allows investors, for the first time, access to smoothed-out returns (i.e. higher likelihood of hitting the 30% average versus the extreme highs and lows).
I look forward to your attendance and feedback.
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