“Imagine an investment that can deliver high returns with barely any risk…”
It’s a compelling idea. It always has been. Following 2022, alternatives broadly and private credit specifically captured the investing public with this idea.
Let’s not throw the baby out with the bathwater and dance on the grave of private credit. There’s far too much of that right now, and I do think it’ll continue to play a very important role in our economy for years to come. Dismissing the entire space is ridiculous.
However, through early 2025, the way private credit was often presented by folks who’d call themselves professionals was shocking. It got out of hand. The pitch has taken different forms over the years but tends to follow a familiar script: attractive returns, lower volatility, less correlation, a smoother ride than public markets. In other words, better outcomes without the same level of risk.
That’s always going to deserve a closer look.
Hiding Risk
There is no free lunch in investing. If something offers higher returns, there’s risk somewhere. That risk may not show up in the same way investors are used to, but that doesn’t mean it’s not present.
In public markets, risk is visible. Prices move every day. You don’t have to wonder where you stand. In private markets, risk can be more subtle. It may show up through limited liquidity, delayed pricing, markdowns, amendments, leverage, there are too many variables to list them all. Sometimes the biggest risk is simply that you can’t understand what’s actually going on in the fund!
A smoother return stream doesn’t necessarily mean a safer investment. It can just mean the volatility is not fully observed on the surface.
None of this makes private investments inherently bad. But it does mean they require a different lens—one that focuses less on the headline numbers and more on the underlying tradeoffs. What are you giving up in exchange for that yield? What happens when markets are stressed? Where does liquidity come from when it’s needed most? These aren’t always easy questions to answer.
Back in 2023, Jason Zweig put it well:
“There are three ways to make money as a writer. Number one, lie to people who want to be lied to, and you’ll get rich. Number two, tell the truth to those who want the truth, and you’ll make a living. Number three, tell the truth to those who want to be lied to, and you’ll go broke.”
There is no shortage of investors who (mostly subconsciously) want to be lied to. They want someone to convince them they can have their cake and eat it too. There’s also no shortage of people who want to get rich. This makes for a diabolical combination and is part of the reason why sales of private investments skyrocketed over the last few years in wealth management.
Root Stance
Our aim is rarely to avoid private markets or alternative investments altogether. It’s to approach them with clear eyes on the incentives, the marketing, and the risk. Every investment comes with tradeoffs.
If something feels too good to be true, it probably isn’t free. It’s just charging you in ways that are harder to see.
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CONSIDER
On the risk note, there’s a caveat to the comment that “risk and return are related” that’s worth acknowledging:
Some risks are not rewarded, they were stupid risks to begin with and incur losses that won’t recover. Smoking. NFTs. Lottery tickets. Memecoins. Sports betting. No need to double down on these activities.However, if you own quality assets, bearing risk is rewarded over time. It’s worth accumulating as many of these quality positions as you can.
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Let’s get after it this week!
Brooks
Brooks Palmer, CFP® is Head of Investments at Root where he helps identify, evaluate, and implement investment solutions tailored to clients’ needs. In Full-Court Press, he breaks down what’s happening in the markets—cutting through the noise and jargon—while connecting it to Root’s core investment tenets so you can make the most of your money and your life!
The examples provided are hypothetical and for illustrative purposes only. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The information presented should not be construed as investment advice or a recommendation to buy or sell any security or implement a particular strategy.
Advisory services are offered through Root Financial Partners, LLC, an SEC registered investment adviser.