Should you invest your 401(k) in private equity, cryptocurrency, or real estate?

By Jeffrey Carter, Translated by Shaw Jinse Finance

Trump signed an executive order allowing people to invest their 401(k) account funds in alternative assets. This can be done directly or in funds that invest in these alternative assets.

Previously, you had to have a special self-managed retirement account to do this and meet the IRS's qualifications for investing in these assets.

I support the democratization of capital. I firmly believe that people should be able to freely use the money they earn. When crowdfunding came about, people thought I wouldn't support it because it would compete with the angel investment group I founded. But I'm all for it.

Honestly, since the end of the Great Recession, simply putting money in an S&P 500 index fund has generally yielded pretty good returns. It's the best way to invest. The majority of my assets are in index funds. $100 invested in 1940 would be worth nearly $900,000 today. For years, I've heard advertisements promoting gold and silver on many news channels and radio. Stay away from them. They don't work. That said, we should also strengthen transparency and disclosure regulations so that people can invest prudently. Funds often hide their performance. They also dramatically inflate investment returns while never reducing them. They also try to hide losses. Some fund managers are not afraid to be completely transparent about their performance. But I've found that few are. Perhaps there should be some kind of standardized audit process that funds must pass before they can take money from people's 401(k) plans? Some funds don't do a good job of reporting on ongoing performance or issues with the companies or assets they invest in. At our fund, we report everything, good, bad, and ugly. We even wrote down the valuation of one company as zero, even though it was still operating. We were almost certain we wouldn't get that money back, so why hide it? Yes, it impacted our performance, but it wasn't a big deal. The next decade will see the birth of some historic companies, and I believe the public should be able to participate in them. Companies can encounter many ups and downs along the way. Some are unexpected, some are expected. For example, in our venture capital fund, we always assume that our dilution rate will be between 60% and 70% from our first investment. This helps us with overall statistical analysis and return forecasting. If you want to invest in private equity or real estate, you'll likely have to go through a fund. The amount of capital you need is simply too high. Private equity funds can easily be worth billions of dollars. If you're not part of a similar entity, you won't have access to investment opportunities. It's like taking a slingshot to a gunfight. However, a fund's performance depends entirely on the managers who manage it. Bad managers create bad funds, and even good managers can make mistakes or bad investments. Hedge funds are another story. I've never made money at a hedge fund. Full disclosure: I have an investment in MLTech.ai. ML matches pools of capital with algorithmic strategies in the cryptocurrency market. The returns after fees are quite good. The minimum investment is $100,000, so it's worth a look. They vet the fund managers and strategies and conduct ongoing audits to ensure compliance. They manage millions in assets and are a real company. Angel investing is similar to venture capital, but different. If you want to invest in venture capital, the fund route is probably the best option. I don't know any great bloggers in real estate, cryptocurrency, or private equity. Often, these bloggers are simply speaking for their own benefit or promoting something. It's no different than a horse racing guide or penny stock recommender. I've found that even some well-known venture capital firms are no different. Cryptocurrency is a completely new and unique space. I invested some money in it, thinking I knew what I was doing, only to discover I didn't understand anything at all. I had a company that had the potential to be successful, but my investment in Helium went off like a hydrogen bomb. Bitcoin or Ethereum are similar, and perhaps Solana as well. Instead of joining a fund and paying fees, buy a percentage of the actual cryptocurrency directly. Coinbase can help you do this. There are some rules of thumb for startup investing. For example, if you're investing in artificial intelligence today, be careful. Those great investment opportunities may have already passed. You can never invest with your rearview mirror on. You have to develop a thesis for the future, think through it, and consider which companies, not yet in existence today, will thrive in that future. Another rule of thumb is winner-take-all. A company ultimately wins based on the people who run it, not the idea itself. In a startup, you're investing in talent. You have to invest early in the funding cycle to get a return. This means you're taking on significant risk. Investing is a bit like playing poker: you invest a bit, see some progress, invest more, see some progress, invest more. But the problem with this strategy for smaller investors is that they might not have room in the next round or rounds. Establishing an investment cadence is crucial. All the great teams and ideas don't usually come together at the same time, but if you know what you're doing and have the right connections, it's possible. Returns on investment typically take ten years. For companies that suffer significant losses, it can take even longer. Of all your investments, you'll be lucky to have one company that's worth a billion or even several billion dollars. I'm still waiting for my one, but I've made enough to retire. Your target return isn't like a stock or other asset return. You need at least a 30x return. I'll explain why below. It's important to remember that some companies don't have the potential to become billion-dollar companies. Entrepreneurs will try to sell you on this, but it's simply not possible. This doesn't mean you shouldn't invest, but understanding this difference helps set expectations, investment amounts, and cadence. If you invest $25,000 in a company with a pre-seed valuation of $7 million, and that company raises minimal follow-on funding and ultimately exits for $100 million, you'll still have a good return. The winners may come from outside the San Francisco Bay Area, New York City, or Boston, but are more likely to be from these three places. If you don't have connections in these areas and want access to startups, find a good fund. Some of my blog readers are pretty good startup investors. They either invest their own money or invest it in a fund. The odds of making money in the investing game are low. David Rose of New York Angel Investments did some math on investments made over the years. Here's what it looks like: Suppose you have $1 million invested in 10 startups, each at the pre-seed stage, for $100,000. For simplicity, let's assume all of these companies fail or exit within ten years. The ten-year limit is artificial, but it allows the following calculations to work. Of those companies, one to five will go to zero. That's $500,000 down the drain. But you still have a chance; there are five more companies. Of those five, one to four will return 1x to 4x, respectively. That leaves just one company. You need to earn a 30x return on that company. That's a threefold return or more on your $1 million, and a respectable 27% internal rate of return (IRR). If you can do that, that's successful startup investing. Sometimes, I invest in companies that look promising. But then, the good times don't last long, and the building collapses, leaving you with nothing. Sometimes, unexpected events occur, and they bounce back. Other times, even the best ideas suffer from botched execution, and you miss out. When you find an exceptional startup entrepreneur, back them financially. They're rarer than diamonds.

Following the signing of this executive order, a large number of funds and investment banks are waiting to sell their junk assets on the open market. When someone knocks on your door and tries to sell you an investment, don't be fooled by their sweet talk. Stay sober, keep your eyes open, and be vigilant at all times.

You can use alternative assets to increase your returns. However, they are very risky, and you may lose everything you invest.