I am part of a lost generation, financially speaking. My peak producing years of 35-50 occurred in the midst of the tech boom and subsequent bust, the 9/11 attacks, the Great Recession, etc. I am also part of the bridge generation during the time when retirement programs switched from defined benefit to defined contribution. Rather than work for one company, I have worked for many.
As I approach my 50th birthday, after thinking about all the good things in my life, it’s easy to look to the future and wonder, “Have I saved enough?” I don’t expect to ever stop working. Nonetheless, it would be great to have a well-planned retirement secured. Perhaps those Fidelity “follow-the-green-line” commercials are having an impact.
So where do I look when considering my retirement portfolio? Given the work I do, I know that venture capital (VC) has long been one of the best performing asset classes. Although illiquid, VC consistently outperforms its peers over the long term. Yes, venture comes with some risk, but over time it is uncorrelated to the market and offers high annualized returns – particularly when the portfolio is properly diversified.
So, why doesn’t everyone invest in venture? First, the SEC limits venture only to accredited investors. Second, the minimum investment to access venture has historically been as high as $1,000,000, limiting the asset class to the top 0.01% of investors. Third, from an asset allocation standpoint, venture should be a very small portion of your overall portfolio. If you cannot have a venture capital firm do the work for you, the time and effort required to find high-quality venture investments outweigh the benefits to most “ordinary” accredited investors. To make venture more widely available, iSelect does the diligence and allows accredited investors to allocate as little as $50,000 across 10 or more venture investments.
Viewed from the perspective of retirement, venture investing through an IRA makes a lot of sense. Rather than paying taxes on winners, 100% of gains are driven back into your investment strategy. Illiquidity is not a factor if you start this strategy at 40 for use at 65. Further, a 25-year horizon gives you time to supplement short-term losses with income during your highest income producing years. Those 25 years of compounding value will correct for a lot of uncertainty. If you look back 25 years, which asset class do you wish you had all your money in?
For example, let’s say you set aside $100,000 in 20 early stage venture companies. Several will fold, but others will make it big. Based on historical venture trends, the winners far outweigh the losses. By systematically reinvesting exits from your initial $100,000, your 20-company portfolio should continually increase as companies exit and proceeds are reinvested in new ventures. As the number of companies increases, the portfolio is more diversified, thus further reducing liquidity risk as you approach retirement.
Over 25 years, some investments grow and succeed and others do not, and at that point multiple companies should be exiting each year, generating cash for withdrawals or reinvesting. Your 25-year investment, now in retirement, has the potential to look more like a high yield annuity.
Of course, a lot of things can change. The companies you invest in may return nothing. In year 15 the U.S. economy could collapse and you could lose all your investments. Anything can happen, which is why you keep working.
But do you really think that over 25 years, $100,000 put away in an ETF will yield more or less than a venture portfolio? If you are 40 years old, accredited, making more than $200,000 per year, and have that earning potential for another 25 years, doesn’t it make sense to place some capital in venture through a tax efficient vehicle like your IRA?
For millennials, do you expect social security to save you? Will your parents pass you a big pile of money in their estate? Who do you trust more, the capabilities of entrepreneurs or the quarterly performance of some large company?
Looking back at it, I wish I had the option to invest in venture when I was 40. Rather than investing $100,000 in each of a few startups, with good and bad results, I would have rolled my 401(k) into an IRA and invested in 20+ companies. But when I was 40 I did not have the option because, at that time, the SEC limited these investments. Venture capitalists were still reserving these options for the 0.01%. Now that the option exists and opportunity is knocking, will you answer?