Allocation Strategy for 2021

 With the start of a new year and a tumultuous 2020 behind us (which saw historic volatile periods), it is imperative to strategically position oneself to achieve an optimal risk-adjusted return on an entire investment portfolio basis. Even with the S&P 500 achieving a +16% return in 2020 and the Technology equities ETF (ticker: QQQ) significantly outperforming the S&P 500, the S&P 500 reached a low of -30% on March 23rd, 2020. Establishing some exposure to cash-flowing assets help tamper down the volatility, prevent trigger sales during significant declines (as we experienced in March and April of 2020), and ultimately improve the risk-adjusted return of a portfolio. For those without the cash-flowing hard assets already established, considering those asset classes might be useful as they do offer tax advantages and a much better understanding of the operations of such a business. Allocating new capital into the stock market (specifically the technology sector) in 2021 is proving to be tricky given the recent high valuations in that sector fueled by the transformation of our lives to a more digital one and although some have suggested and speculated a rotation into value stocks, we are yet to see a major rotation of that sort yet. A well-diversified portfolio will consider the age of the investor, stage in life, current assets, liabilities, income, existing cash flowing properties, and future goals. Such a portfolio could consist of an allocation towards stocks and alternative investments or stocks and bonds, or stocks, bonds, and alternative investments. I generally do not favor bonds due to their recent correlation to the stock market as seen in the stock market crash in 2020. Bond funds also saw a collapse in price and are no longer considered a non-correlated asset class to the stock market.

This brings alternative investments into the picture. These types of investments are non-correlated to the stock market and in the short-term are fully dictated by the actual near-term cash flow instead of a general sentiment on how the economy is "perceived". Alternative investment platforms such as Fundrise and Groundfloor offer instruments that provide the average investor an opportunity to own asset classes that institutional investors have historically owned and continually generate cash flow passively. Other platforms are NextSeed and Streitwise. NextSeed offers small businesses a platform to raise funds/investment capital and access to investors. If you are a small business looking for a referral to NextSeed, drop me a line and I will pass it along to NextSeed as you will be able to receive a credit for the referral. Other investment asset classes that are available to the average investor range from real estate, private credit, and private debt deals. Groundfloor is a real estate marketplace where an investor can choose private debt deals to invest in which are all backed by collateral in the case of a default protecting the investor's capital. It achieved SEC qualification as a Reg A+ vehicle. Groundfloor recently raised $3.35 million series B funding on SeedInvest and the average rate of return since inception is about 10.6% for a diversified allocation on their platform. The private investment vehicle I would recommend NOT investing in is WithCadence as they have lost investor's capital and lack transparency in the performance of the assets they place on their website.

Personally, even with a +40% return performance in my equities portfolio, I fully appreciated the importance of a stable cash flow during the COVID-19 outbreak and the government shutdown in 2020. My alternative asset was able to perform on expectations with some asset classes such as a triple net lease healthcare facility out-performing expectations. Looking forward to the year 2021, I expect a conservative yield by asset class to mirror the image below very similarly. These obviously exclude appreciation of the asset class and any stock positions owned. The low expected yield for the apartment asset class is due to 2 of 3 new constructions not stabilizing till 2022 and that applies to a hotel located in the southwest.

All in all, 2021 offers another opportunity to generate alpha, and maintaining a proper diversification strategy can prove crucial to attaining outsized risk-adjusted returns as compared to a single asset class.

Financial Savant was born in 2018 and has received a really good reception so far. This blog serves as a resource to help spur open discussions on generating income, saving, investing, and overall wealth management.

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