FOMO, or the fear of missing out, has a powerful effect on the uncomfortable investor, always twitching about who’s doing what and how he’s not going to let that happen to him. And sure enough, he gets caught up in the mess.
Nowhere is the fear of missing out stronger than in private markets. The fear is so great that uncomfortable investors are willing to absorb large fees to participate. The Wall Street Journal’s Jason Zweig explains the costs of special purpose vehicles (SPVs) used by investors to get in on the “action.” He writes:
SPVs can bear upfront fees that could hit 5% to 12% or more, say industry executives. Some also charge performance fees that take 10% to 30% of any gains. The highest costs are hard to overcome, says Tom Callahan, chief executive of Nasdaq Private Market. “You better hope that company 10X’es or your return will be eroded away in fees,” he says.
Less-expensive alternatives are becoming available, but they still aren’t cheap compared with the costs of investing in public markets.
Action Line: Now 401(k) investors are being tempted by private equity and credit offerings, usually bearing high fees, in their retirement accounts. Be careful. Buying potentially underperforming, illiquid private assets from institutional investors looking to offload them onto unsuspecting retirement investors is a dangerous game. When you want to talk about rolling your 401(k) over into an IRA for more available investment options, email me at ejsmith@yoursurvivalguy.com. And click here to subscribe to my free monthly Survive & Thrive letter.
