Have you ever wondered why so many wealthy individuals continue to pour billions into hedge funds, private equity, and other specialized actively managed funds, despite their history of often underperforming compared to the S&P 500? A lot of this has to do with the allure of alternative assets—like venture capital and leveraged buyouts—which aren’t as readily priced as traditional securities and offer a playground for those looking to capitalize on market inefficiencies.
Since 1999, I’ve been funneling a portion of my assets into these types of investments, and I’ve noticed that my reasons for doing so have evolved over the years. I’d like to share how these reasons can change as you age, based on a discussion that started from a question a reader posed on my blog.
In your 20s, investing in actively managed funds is often driven by curiosity and naivety. For example, my first investment was with Andor Capital through a Goldman Sachs 401(k) plan. I was drawn by the exclusivity and potential returns, despite the higher fees. Back then, contributing up to the $10,000 max to my 401(k), I was more interested in the excitement of being part of something that seemed elite. And during the dotcom bust of 2000 and 2001, this hedge fund performed exceptionally well by shorting tech stocks, which only reinforced my investment decision.
As you move into your 30s, your motivations tend to shift towards bigger dreams and aspirations. You hear stories of fund managers who’ve made astronomical returns and it inspires you to think that you could do the same. This is the decade where you start making significant financial decisions that might lead to substantial gains—or losses. Even if many active investments underperform compared to passive indices like the S&P 500, the success stories keep you hooked on the possibility of hitting it big.
When you reach your 40s and beyond, your focus often turns towards security and capital preservation. At this stage, you’re more experienced and likely have more wealth, which allows you better access to high-performing funds. Investing in active funds now becomes a choice for peace of mind, trusting seasoned fund managers to safeguard your capital rather than chasing high returns.
Investing in unicorns and looking for the next big tech breakthrough becomes a real possibility with funds like the Innovation Fund from Fundrise, which targets emerging sectors like AI and tech infrastructure. With options to invest with as little as $10, it’s much more accessible than traditional venture capital funds that require hefty initial commitments.
As you accumulate wealth, your investment strategy naturally shifts towards diversification and risk management. If you imagine having $10 million in investable assets, you’d likely spread this across various assets like real estate, stocks, and safer investments to ensure steady returns with lower volatility, rather than trying to outperform the market.
My personal journey and the discussions on my Financial Samurai blog show that investing is not just about the numbers but also about living a life enriched with experiences and security. Whether it’s enjoying a peaceful day at the zoo with my daughter or choosing investments that offer stability and peace of mind, the goal is to support a fulfilling life without the constant worry of financial upheaval.
