If you’re like most investors right now, chances are you’re scrambling to diversify your portfolio.
As we have discussed many times in the last few months, times are tough. Traditional asset classes are not as reliable as they once were, and we are likely entering a prolonged period of economic uncertainty.
And yet, there is hope.
There are a number of overlooked alternative asset classes that can help both new and seasoned investors strengthen their portfolios as they minimize risk and improve returns. Take a look at Blackrock, Morgan Stanley, or any other major market leader, and you will likely find articles focused on hedge funds, commodities, and collectibles.
While there’s nothing wrong with these asset classes, here at Vicinity, we believe that regulation crowdfunding (or Reg CF) offers investors a number of unique advantages to help them rise above the looming recession.
In today’s article, we will look at these benefits and provide some resources to help new investors get started.
Let’s dive in.
Reg CF: A Brief Overview
Reg CF is a U.S. statute that allows private companies to raise capital from the public. Or, framed the other way around, it allows the general public to invest in private projects.
Although often confused with other types of “crowdfunding” (i.e., donation and rewards), Reg CF is different—it’s what we call “crowdinvesting.” In the other forms of crowdfunding, there’s no chance of getting a return on the money you put in. The only gain is sentimental or practical: you help fund a project out of kindness or because you’re interested in the end product.
Reg CF gives you the sentimental connection (as in most cases, you will be investing in your local community), plus the possibility to gain actual financial returns from your investment.
This is just the tip of the iceberg when it comes to Reg CF.
To learn all about what it can offer and how it works (especially if you’re a millennial or new to investing), take a look at our comprehensive guide: Millennials and Investing: A Complete Guide to Reg CF.
What Is Portfolio Diversification and Why Does It Matter?
To really understand how powerful of an investment tool Reg CF is, we first need to talk about portfolio diversification. Or, as Nobel Prize laureate Harry Markowitz is reported to have called it, “the only free lunch in finance.”
In a nutshell, diversification can be defined as mixing different investment asset classes in your investment portfolio as a strategy to mitigate risk.
For example, let’s imagine that your entire portfolio consists of publicly traded stocks. If the market tanks, well, your portfolio will go with it. A diversified portfolio means spreading out your risk by investing in additional asset classes. There isn’t 100% agreement among investors with respect to exactly how many asset classes there are, but that’s not the point.
What is relevant to you is to add more assets, preferably from markets/classes that do not depend on each other. Also known as “low-correlation” investing, this means that just because one asset class drops in value, it won’t necessarily result in portfolio armageddon.
In other words, the best defense is a good offense. The more you diversify, the more likely you are to balance your risk and improve the overall health of your investments.
Benefits of Reg CF for Investors
Reg CF, as you’ve probably guessed by now, helps drive portfolio diversification. And yet, it also offers so much more. Here are five benefits of investing in Reg CF(which you can do through an SEC-registered platform like Vicinity). Keep in mind that this list is not exhaustive, and that you can always reach out to us at [email protected] to learn more.
Before Reg CF came along, investing in private businesses was a financial luxury—only accredited investors (i.e., the very wealthy and highly experienced) could be a part of it. As we covered in our Reg CF guide for millennials (linked above), only 10% of Americans are accredited investors.
And yet, thanks to Reg CF, investment opportunities previously reserved for accredited investors are now open to the other 90% of Americans. Investing has truly become for everyone. Today, if you’re over 18 years old, you have practically nothing stopping you from investing in a Reg CF deal that you find attractive.
2. Get in Early (And at a Low Price)
One of the most attractive features of Reg CF investing is that investment opportunities offer investors a first-mover advantage. Projects tend to be in their infancy, and you can help build them from scratch. That gives you the ability to invest in something you truly believe in, and you won’t have to worry about losing out on an opportunity to Wall Street.
Tied to this first-mover advantage is the fact that minimum investment amounts (for non-accredited investors) tend to be low.
As minimum investment amounts will vary, we recommend that you check out the Vicinity Marketplace to get a feel for the range of starting investments. But remember, as an unaccredited investor, the law limits your maximum investment amount based on your income and net worth.
Note that this is in stark contrast to accredited investors. While the former is limited with respect to total investment amounts, the latter has no investment limits. It is for this reason that most Reg CF opportunities will have a diverse mix of both accredited and non-accredited investors.
Again, check out the previously linked Reg CF guide to learn more.
3. Opportunity to Support Your Local Economy
Why just eat local and shop local when you can invest local?
Most Reg CF offerings (particularly on the Vicinity platform) support the needs of real estate developments and small businesses that drive job creation in local communities. The beauty of Reg CF is that it allows you to go from a sideline spectator to a real community advocate. In fact, since Reg CF came into effect, around 332,000 jobs have been created by funded deals, which tractioned $3.4 billion in economic activity.
4. Investor Autonomy
For most of us, investing isn’t what we would call our 9-5. In fact, most investors are what are known as retail investors. For traditional investing, retail investors will often pay higher commissions and higher fees on trades while also being forced to buy and sell investments through a broker, bank, or mutual fund.
In other words, they are charged more, afforded fewer opportunities, and are often restricted to working with or through an established institution or professional investor. Conversely, investing via Reg CF brings you as close as possible to your investment, with no big bank BS, and very few restrictions. At the end of the day, you act as your own financial advocate when investing through Reg CF.
5. Investor Protections
At first glance, a limit on how much you can invest through Reg CF may seem like a bad thing.
However, considering the investor autonomy afforded by Reg CF (highlighted in the section above), it’s a smart move by the SEC. Investor protections provide investors with the freedom to decide what they are going to invest in and when, while also making sure less experienced investors won’t go belly-up when an investment doesn’t work out.
These limitations are beneficial, especially when compared to a traditional asset class market like the stock market, where the average investor has underperformed every year for at least 25 years (see this 2018 Dalbar study for proof).
A Quick Word on Investor Due Diligence
Before we wrap up, it’s important to say a few words about investor due diligence. First, it’s a necessary process to help avoid and manage risk, and second, Reg CF helps streamline this type of risk analysis.
Due diligence is all about informed decision-making. While a due diligence analysis will vary from asset class to asset class, it typically requires a concerted effort on the part of investors to determine a number of important financial factors relating to the history, performance, and ownership of the investment opportunity.
Sometimes this information is readily available and easy to digest… sometimes it’s not.
What is great about Reg CF is that investor due diligence is made easier than with other traditional investments. All Reg CF offerings and transactions must be conducted exclusively through an SEC-registered platform, which in turn can only be operated by a registered broker-dealer or a funding portal that’s also a member of FINRA. Vicinity, for example, is one of them.
Investors will find a comprehensive overview of each investment opportunity, including project, investment, and stakeholder summaries. In addition, investors can also interact with issuers and fellow investors to discuss the investment opportunity and turn due diligence from a solo show into a collaborative venture.
Invest In What You Know With Vicinity
Now you are more familiar with the benefits of Reg CF, you are better prepared to begin diversifying your investment portfolio, especially as we head into a recession. At Vicinity, our mission is to connect investors like you with your next investment opportunity. We do this through our deal marketplace.
Once you register, all it takes is a few clicks to get started investing in what you know. Whether it’s a boutique hotel or a new neighborhood amenity, you’ll find that we offer a wide range of investment opportunities designed to boost both your local community and your portfolio’s bottom line. To learn more, contact us today!