Investing is changing … why your portfolio could look completely different in a decade
The first issue of The Amazing Spider-Man comic book would have cost you $0.12.
Today, you’d have to shell out more than $40,000.
If that’s chump change for you, you could step up to a bottle of 1787 Chateau Lafite, owned by Thomas Jefferson (apparently, he had his initials engraved on the bottle though he never drank it).
This would set you back around $160,000.
But if you’re a real collector, you’d scoff at these amateur items, and track down a T-206 Honus Wagner baseball card.
Its price tag is $1.26 million, though speculators say it could go for 3-times that amount today.
Now, what if you could actually own any of these items? For real — even with your “non-multi-millionaire” net worth?
The reality is we’re moving closer to this being an actual possibility.
Let me digress just a moment …
As we’ve talked about in the Digest, this is an amazing time to be an investor. Over the next decade, the technological advancements we’re going to see will transform our world and day-to-day lives — and by extension, our portfolios, if we’re positioned properly.
But that’s not the only change we’re going to see …
How we invest will change as well.
In today’s Digest, we’re going to talk about something that will upend the investment process over the next 10 years. It’s going to change how we view our portfolios, while offering greater diversification, liquidity, and transactional ease.
And yes, it means we could own a multi-million-dollar collectible … well, at least part of it.
You’re going to hear a lot about this, so let’s make sure you’re ahead of the curve.
Today, let’s dive into the world of asset tokenization.
***A quick primer on asset tokenization
To put it simply, tokenization is the process of converting rights — or a unit of asset ownership — into a digital token which trades like a stock or bond.
Let’s illustrate with an example.
Say you have an apartment building valued at $2,000,000. Tokenization could transform it into 2,000,000 tokens (the number of tokens is arbitrary). So, in this case, each token would represent a 1% share of this apartment building.
Tokenized ownership would then be documented on the blockchain. And just to make sure we’re all on the same page, you can think of blockchain as a public ledger, which is totally immutable. This would mean that once you buy this tokened asset, no one could “erase” your ownership of it — it’s publicly documented for all to see.
At that point, these tokens would then trade between investors on an exchange, similar to how we trade stocks and bonds.
So, let’s say someone tokenized that Honus Wagner baseball card for $1.26 million. Well, technically, you sink in, call it, $1,000, and be a partial owner of one of the most valuable collector’s items in existence.
This process can be applied to regulated financial investments like stocks and bonds, but its real power is when applied to tangible goods — collectibles, real estate, precious gems, fine art, exotic cars, stamp collections …
But it doesn’t have to be tangible. You could tokenize copyrights to works of authorship — like, a music catalogue.
For instance, what if the Beatles music catalogue was tokenized and you owned a sliver? Every time “Hey Jude” played on the radio, your tokenized investment would entitle you to just a little bit of the ensuing royalty payment.
Tokenization could even open up the world of private equity deals to everyday investors. Historically, these investments have had huge barriers to entry in the form of high minimum investment requirements. As such, generally, only ultra-high net worth individuals and institutions have accessed this asset class.
Tokenization could upend that.
***The many benefits of tokenization
First, as we saw in the collectible examples that opened this Digest, tokenization would open up a whole new world of investment opportunities for average investors of limited means.
You see, the average investor tends to have the majority of his/her wealth tied up in stocks, bonds, and their primary home. Compare that to how high net worth individuals invest.
The below chart comes from Credit Suisse. Notice the 6% allocation to collectibles, and the 24% allocation to non-primary real estate:
By the way, if you’re curious about the long-term returns of collectibles, you might be surprised at how they perform.
As you can see below, the long-term return on exotic cars isn’t far below that of world equities.
But consider the different mindset when investing in a collectible. There’s an “enjoyment premium” that comes with, say, a vintage car, that couldn’t possibly come with owning a General Electric bond.
Returning to the benefits of tokenization, as noted above, ultra-high-net-worth individuals also allocate 24% to non-primary real estate.
Most average investors don’t have the capital for this. For example, imagine you want to invest $5,000 in an apartment building. How is that sized investment going to get you access to a 20-unit apartment?
Traditionally, it can’t.
Given this barrier to entry, wealthy investors tend to continue leveraging their wealth to purchase and rent out income-generating properties — thereby increasing their wealth — while investors of more modest means can’t get past this initial investment-size hurdle.
With tokenization, this all changes.
Even modest-sized sums of money would be able to be funneled into traditionally “high dollar” asset classes.
***This dovetails into yet another benefit — the greater portfolio diversity of tokenization
As mentioned above, the average investor’s net worth is tied up in stocks, bonds, and his/her primary home. Though the widely-held opinion is that stocks and bonds together offer diversification protection in a portfolio, the reality is that in times of major market turbulence, both of these asset classes can selloff together. You may have heard the phrase, “in a crisis, correlation goes to ‘1.’”
But what if you weren’t limited to just these asset classes?
What if your portfolio had the foundation of domestic and international stocks and bonds, but then it included a Picasso painting, a luxurious ski chalet in Aspen, some private equity deals, the Rolling Stones music catalogue, an apartment building in Rome, and a vintage Aston Martin?
Think about how this would insulate your portfolio returns during times of stock market upheaval.
Beyond diversification, there are many other benefits. Noting just a few …
– Faster transactions and a 24/7 market thanks to blockchain
– Decreased transaction costs and fewer middlemen also thanks to blockchain
– A tidal wave of liquidity for traditionally illiquid markets
– No more geographic limitations. With one click, you could invest in, say, an office park in Shanghai.
***The challenges facing tokenization before you see it everywhere
We’re still a way off from widespread adoption.
Perhaps the biggest challenge is standardized regulation.
For example, what happens if a company that has tokenized an apartment building sells the building?
Token owners only own … well, tokens. At present, there aren’t standardized laws that protect the legal right of token holders. So, legal changes need to be adopted to reflect this technology.
There’s also the issue of custody. You need to have a qualified custodian to hold an asset. For example, last year, a vintage 1962 Ferrari 250 GTO sold at a Sotheby’s auction for over $48,405,000. Was this car tokenized, who would actually take position of the car, and keep it safe and maintained?
This question points toward the reality that the entire digital token ecosystem needs to be further developed before this process is seamless.
That said, adoption has already started. For example, check out Maecenas.co — it’s a website offering tokenized fine art. Here’s are a couple screenshots:
Despite these advances, we’re still in the infancy of tokenization.
We’re going to need to see greater development of the exchanges, increased liquidity in the markets, and new, protective regulations. But given the vast benefits of tokenization, these changes are likely just a matter of time.
It’s going to be fascinating to see how this market develops … as well as which specific assets will be tokenized and available for investment. We’ll continue to keep you up to speed.
Have a good evening,