Let’s face it, some investments are boring and they won’t grab the headlines or dominate water cooler talk. But, the one thing they won’t do is kill your portfolio like some of the new and exciting investments that have crashed and burned recently.
Just over the last few years, we’ve seen all kinds of “next big thing” investments experience meteoric launches due to going “viral” only to crash and burn in spectacular fashion. Cannabis, crypto, NFTs, the metaverse, plant-based meat (i.e., Beyond and Impossible), and now AI. These have all gotten airtime on CNBC, Bloomberg, talk radio, and social media, but none of it mattered. Without strong underlying fundamentals, these exciting and new investments were bound to fail.
All new things get media attention. It’s how the media gets paid. News is about what hasn’t been heard, seen, or known before. It’s what’s new and what will get the masses excited. Nobody wants to check in on the news or social media news reels to hear old boring news.
I get it, boring is, well, boring. It’s not “new” or “exciting,” but can it be profitable? So where should we invest in terms of the excitement scale? Is money to be made on bleeding-edge investments?
I think this is where crypto, NFTs, AI, and the metaverse, can fall under. We’re now also seeing government meddling turn what were once considered “safe” investments into ultra-risky ones. Take short-term rentals (STRs), for example. STRs were once seen as safe cash cows, but now that we’re seeing states and local municipalities insert themselves into the industry and imposing restrictions that effectively handcuff a once hot real estate segment, the financial prospects from STRs are no longer a sure thing.
Here is a scale I’ve created of where I believe some of the more common investments fall on the boring-excitement scale:
Now, some would equate those assets on the “Exciting” end of the spectrum to be high-risk assets, while those on the “Boring” end to be low-risk ones. Conventional wisdom will tell you that while “Exciting” investments may be high-risk, they may also be high-reward. On the other hand, “Boring” investments may be low-risk, but also low-reward.
So, according to the conventional risk-reward spectrum, boring investments may be safe, but they can’t be rewarding. Right? Wrong. What the wealthy have figured out – and it’s the reason why they’re wealthy – is that boring can be rewarding despite the naysayers. Commercial real estate, in particular, can reward investors with above-market returns at reduced risk.
In the chart above, the Sharpe Ratio is a common measure of volatility among the various investment asset classes, and commercial real estate returns are measured according to the NCREIF Property Index (NPI), based on data reported by the National Council of Real Estate Investment Fiduciaries.
Investments in private companies (Private Equity) may be considered slightly boring but also have the potential to generate above-market returns at reduced risk.
The preceding demonstrates the value of having private investments in a portfolio. The higher the allocation to private investments, the higher the average returns of a portfolio over time. Not only do portfolios perform better when there are higher allocations to private investments, but those higher returns come with less risk since private companies are not publicly traded and are therefore sheltered from broader market volatility. So, just like commercial real estate, private investments have the ability to not only generate above-market returns but do so with less volatility.
Investors have long taken the bait on exciting new investments only to see their portfolios come crashing down. In just the past few years, we’ve seen portfolios wiped out because they jumped on the latest investing bandwagons like NFTs, crypto, the metaverse, and fake meats.
Smart investors don’t take the bait.
They prefer boring because it’s the surest way to get them to where they want in the shortest amount of time – financial independence.
By sticking to boring assets and a few fundamental investing objectives, such as investing in tangible assets that generate consistent and reliable passive income, that when combined with appreciation of underlying assets along with tax benefits, create the ideal mix for creating, growing, and maintaining wealth. Instead of looking for that next big thing, smart investors are more interested in consistency so they can put their money to work and confidently know that they can count on reliable returns that they can reinvest to grow their wealth. This is not possible with “Exciting” but unpredictable and volatile assets.
If you don’t mind watching your portfolio get wiped out, then chasing “Exciting” investments may be right up your alley. If you’re interested in building real wealth, consider boring to the left-of-middle assets that may not grab the headlines but have the best chance of granting you your freedom – your financial freedom – instead of fake investments.