Last year was a bruising one for investors. A combination of factors, including rising inflation, monetary tightening and growing geopolitical tension, weighed heavily on markets throughout 2022, leaving many participants nursing significant markdowns on their portfolios.
These concerns could persist for some time, which may lead some observers to curtail spending and leave their cash on the sidelines. However, particularly given the inflationary environment, many others are realising that it’s now time to make their money work even harder.
Our recent Investor Survey illustrates this, finding that 83 percent of our 244 respondents were planning to add new allocations to private equity taking advantage of opportunities available to GPs in the current downturn.
The downturn crystallises the importance of diversification and putting available capital to work on long-term goals. With that in mind, here are a handful of ideas for ways to make your end-of-year compensation work for your future.
Traditional pension savings may not be enough to fund your golden years given that pensions schemes track public market returns. This is even truer today after what was a historically bad year for public equity and fixed income markets alike, which even saw some pension funds come close to collapsing after sharp falls in asset prices.
With this in mind, it may be worth considering investments in alternative assets that can provide steady income streams and a hedge against inflation, as well as reduced correlation with public markets.
In private markets, this can include private debt and infrastructure funding, especially if you prefer a more flexible approach to saving. Ensuring you have enough after you leave the office for the last time can give you the peace of mind necessary to enjoy your retirement without worrying about your future finances.
In today’s high interest rate environment, accessing financing for long-term, speculative projects such as a new business venture can prove difficult and expensive, even with the support of bootstrapping and angel investors.
To finance them with even larger sums, you may want to consider investing the bonus into assets that match your longer-term horizon and offer outsized wealth creation.
Private equity can work well for investors who intend to maintain long-term exposure. While PE funds typically have a 10-year lifespan, the profit distribution starts at around five years after committing capital, which can be considered an upside if you are able to lock in capital and reap potentially higher returns after some time. Historically, private equity has outperformed public markets.
Gifts are a nice treat, but a gift that keeps on giving is even better. Create an additional source of cash flow by buying yourself things that may appreciate in value. Here are some of our favourites:
Watches — In the best case scenario, the right watch can double in value (although 10 to 30 percent appreciation is more likely). Of course, only a few of the most special, rare or luxurious pieces will accrue value. However, even if the price after purchase doesn’t shoot up, you’ll still own luxurious timepiece to flaunt.
Art — Besides making walls look good, art can offer some nice profits, as well. According to research from Citi, the global art market as an asset class returned 28.2 percent from 2020 to June 2021.1
Wine — Only the finest bottles from established winemakers in the best regions have the potential to increase in value. In some cases, an exceptional vintage can lift all boats, including the specimens with a less prestigious history. The value of fine wine rose 16 per cent in 2021, according to a report from real estate consultancy Knight Frank.2
Allocating money toward long-term aims does not necessarily need to correlate with expected financial returns. Instead, invest resources into your personal and professional fulfilment.
However, not all extracurricular activities need to be linked so directly to work; Goldman Sachs’ CEO David Solomon, for instance, began DJing in 2015 and has since performed at major music festivals. Indeed, research indicates that executives with dedicated pastimes outside the office can bring additional benefits; bosses with pilot’s licences tend to lead more innovative firms, for instance, while those who run marathons oversee better-performing businesses.3
Investing in your future doesn’t necessarily mean your own education or lifestyle, either; a survey by NatWest in 2021 found that more than three-quarters of parents/guardians with children under the age of 18 are saving or investing for their children. The same research found, however, that 83 percentof these savers are doing so only in cash, the value of which is eroding with persistently high inflation.4
Given this context, 2023 may prove an opportune moment for parents to rethink how they are saving for their future generations and shift to a more diversified set of assets
Research has indicated that donations have fallen significantly since the height of the coronavirus pandemic. Combined with rising inflation, this means that many charitable services are trying to meet with higher demand with fewer resources. For those who can afford it, giving back to communities and causes becomes even more important during times of economic strain.
Going this route can even be more attractive to private equity investors. Depending on their jurisdiction, they may be able to amplify their giving by managing their tax obligations efficiently.
But before you start giving, it’s a smart idea to first do your due diligence. GiveWell and Charity Navigator, for example, are two platforms that can help you find the best charities across different categories.
* Past performance is no guarantee of future returns.