On this episode of The Impatient Investor, Andrew discusses private placement securities. Companies and investors both benefit greatly from the issuing of private placements, and unlike bonds, private placements are not correlated to the stock market or the broader markets. This means that private placement securities can flourish in a recession and allows private investors true diversification.
“Unlike bonds, private placements are not correlated to the stock market or the broader markets. The value of a private placement depends entirely on the performance of the company itself.”
FULL TRANSCRIPTION:
Private placement securities are similar to typical stock offerings but to private investors rather than the public. And they allow companies to raise significant capital without having to become a publicly-traded company. Private investment opportunities are typically offered in the early stages of a company’s life when they’re trying to grow or acquire key assets. Companies and investors both benefit greatly from the issuing of private placements. Investment companies that use private placements do so by providing opportunities to investors with a defined exit and the expectation of an ROI, true diversification.
Economic uncertainty defines the last 20 years, between the dot com bubble, the financial crisis of 2008, the scores of smaller corrections, and COVID-19, the stock market has been continuously fluctuating. Investors are typically advised to protect themselves by using bonds and index funds to cushion the blow. Unfortunately, this advice falls flat. While investing in an index is better than your entire portfolio being a single company, it still leaves you vulnerable. A stock market crash leads to significant losses of value. No matter how many stocks make up your portfolio.
If you consult with financial advisors or investment brokers, you will probably receive the same advice that everyone else gets; invest in stocks, bonds, and not much else. What they don’t tell you is these types of investments have pivotal flaws. Bonds have low upside and are highly dependent on interest rates. The result is underwhelming gains when times are good and unexpected losses when times are bad.
The stock market has its flaws too. It is highly unpredictable and carries considerable risk. The advice given to avoid these risks is diversification, but diversification is much more difficult to achieve than people think. Is your portfolio truly diversified? The word diversification gets thrown around a lot in the investing world, with confusion surrounding what constitutes a truly diversified portfolio. Investors will choose to invest in an index fund thinking that they have diversification. Subsequently, the market drops and their whole investment loses significant value.
Investors also turn to bonds for diversification with the same results. Both markets fall at the same time and their allegedly diversified portfolio suffers loss. What investors usually realize during downturns is that their portfolio was not sufficiently diversified.
Unlike bonds, private placements are not correlated to the stock market or the broader markets. The value of a private placement depends entirely on the performance of the company itself. When the stock market falls that company can flourish. This disconnect from the global market allows private investors to experience true diversification.
Take the 2008 recession for example. While many companies suffered retraction big names like Amazon and Ford kept growing. Though they didn’t show up on the news, many smaller private companies also continue to flourish. Diversification with private placements allows a portion of your portfolio to be independent of the stock market and shielded from the volatility. Diversification is one of the many benefits of private investing.
Next, you’ll see the return potential of private investments to grow your wealth today and for future generations, and if you’re looking for more information, go to www.stoptradinghours.com.
