It’s been unsettling to watch as the stock market continues to rally at a moment when almost 50% of the country is unemployed. Part of the reason for the stabilization has been the Federal Reserve’s decision to pump $3 trillion into the market to stave off a crash. For Tory Reiss, an entrepreneur in the Fintech space, the disconnect between stock prices and the reality of the market is a red flag. It’s why he believes that to truly diversify your portfolio, you have to look outside the public market.
Reiss is a two-time founder of VC-backed Fintech startups. Most recently, he was the Co-Founder of TrustToken, the creator of the world’s first fully-backed USD Stablecoin, TrueUSD with ~$4B+ in avg. 30-day volume. Prior to TrustToken, Tory co-founded Harvest, the first AI-driven debt management and refinancing platform meant to accelerate consumers’ journeys out of debt.
Reiss was thrust into a personal-finance expertise out of an all-too-familiar necessity: debt. But that crash course has led him out of the hole and to an expertise and outsider view that’s allowed him to see the market differently.
Unifimoney: How did you first enter the Fintech space?
Tory Reiss: I got fascinated with personal finance and investing out of necessity because I found myself in a situation where, when graduating school, I had an incredible amount of debt — not only student debt but I have a whole crazy other story where I had been essentially accused of a crime I didn’t commit and so I was fighting a legal battle and had to take out debt to pay for a lawyer. So, I was really, really leveraged and really, really young. It’s an awful combination.
The good news, though, in hindsight, was that it lit a fire under my ass to really self-educate. I was fortunate to be living with a financial advisor who was studying for his CFP and his 65 and his 7 and all these different exams, so I was just inhaling all the material that he was and taking his practice tests. So, that was also just a happy coincidence. But I was doing all of this on the side of my day job, which at the time was working for Microsoft.
The long story short is that I spent the first half of my career working in tech, both startups and corporations, and in parallel, my hobby became building passive income streams: experimenting with building side business, as well as teaching financial literacy classes. Eventually, though, my obsession converged with my profession when I started my first Fintech company back in 2017. I’ve been working in Fintech ever since.
I’ve now started two venture-backed Fintech companies, one of which was in the consumer-debt refinancing space, and then the other was in international global money movement using blockchains. And we built what was the largest dollar-backed stable coin at the time — we were helping people move around $2 billion per month.
So, that was my last company and now I’m yet again in the process of starting another company that’s all premised on my thesis that yields are increasingly going to be moving from public markets to private. This has already been the case for quite some time, but I think now, unfortunately, due to the Fed intervention, it’s just going to accelerate this trend. It might not seem like it now, but I think this is a temporary exuberance that’s going to burn out pretty quickly.
Unifimoney: In light of the Fed intervention, what’s the importance of investing in alt assets?
Reiss: I think it’s critical. What’s happening in the public markets is there’s a number of pretty massive systemic risks that have been introduced due to both intervention by the Fed, as well as some organic trends that have been playing out for about 40 years thanks to index funds and passive investing vehicles. It’s just a long-winded way of saying that, increasingly, the places where you can still find alpha or returns without sacrificing crazy amounts of volatility is going to be in private markets.
These are alternative asset classes like real estate, startups — both hyper-growth but also just small businesses of the type that private equity tends to look into acquiring and building portfolios of — as well as some newer emerging asset classes that previously were really hard or illiquid to get into like farmland and even, for some people, things like art and other forms of collateralized debt.
So, I think that’s a part of a larger semantic trend.
Unifimoney: The idea that it’s responsible to diversify your portfolio is a pretty well-worn idea. Are you saying that if that diversification is happening within the same public market, it’s still a dangerous play?
Reiss: Think about it this way: when you invest in a passive portfolio — let’s say you buy a Vanguard fund that is reflecting the entire U.S. stock market — you’re trying to achieve ultimate diversification, but there’s an underlying assumption in that purchase which is: I fundamentally believe in U.S. growth. You’re buying into the concept of the growth narrative that’s been propagated: effectively that U.S. commerce is just always going to go up and to the right, and that’s going to go at a rate of something like 7.8%. And that has been true historically. If you’re looking backward, that is true. And so, therefore, the best advice was: ‘Don’t try to invest in any one sector. Don’t try waiting. Don’t try to beat the market. Just buy the whole market and invest in the underlying thesis of growth.’
Now, I think that advice has been by far the best advice throughout our entire lifetime. Theoretically, that could continue being the case, but it’s looking increasingly unlikely and a big part of that is because the Fed is basically injecting unlimited amounts of liquidity into the market so that the markets no longer reflect the underlying economic realities of the companies that are being traded within it. So, when that happens, it can create short-term pain relief, because the markets are continuing that growth narrative of always moving up and never moving down, but what we’re setting ourselves up for potentially — and again, it’s just one possibility of many — is a situation where underlying growth has stalled but the stock prices don’t reflect that. The stock prices just continue moving up exponentially.
In my opinion, there has to be a correction toward economic reality at some point. That could take the form of just stagflation which is where the markets just move sideways for 10 or 20 years — which, if you look at Japan, is exactly what’s played out there. Or there could be a massive inflationary event and we see another big deleveraging in that way. That seems less likely because it would take the world deciding they could no longer trust the dollar.
It’s just a long way of saying: when you buy a passive vehicle, you might think you’re diversifying into everything, but you’re actually buying into a narrative. You have to think about whether that narrative is correct. And by the way, I’m not actually saying to not buy passive indexes; I’m just saying most investors today, that represents their entire portfolio. But if you look at the ultra-high-net-worth individuals, it’s a tiny fraction of their portfolio. So, that’s where the big disconnect is. A whole generation of wealth managers have been taught to just put everyone in a 60–40 or 90–10 portfolio and just let it ride, and I think that that portfolio construction is definitely not set up to succeed over the coming decades.
Unifimoney: What are the alternative narratives that your alternative asset classes can diversify against?
Reiss: What’s beautiful is you can actually invest in other narratives. There are strategies that, for example, trade market neutral. For example, a strategy that makes money just on volatility. Whether the market goes up or the market goes down, they can make money either way because you can, for example, make a bet that: all of this injection of liquidity is going to lead to an incredibly volatile next decade. That’s a bet you could make by holding money in a fund that trades on volatility.
And there are a handful of other strategies that are market neutral, or simply hedged, that also trade on different premises. I would highly recommend that people look at those types of strategies.
The flip side of that is that I still think yields are really great in private market investments. You can still invest in a really great real estate deal and you can earn 18%, 20%, 30% IRR on these private market multi-family commercial real estate deals even in an environment like the one right now that we’re facing. What I’m saying is: it’s a different type of diversification than most people have been trained to think of. You’re trained to think ’Buy the whole universe of stocks and bonds’ and I’m saying that the actual correct advice is: ‘Yes, buy the universe of stocks and bonds, but with a fraction of your portfolio, and then actually allocate meaningful portions of your portfolio to alternative assets that you can have something more of a control over the projected returns and also add diversification out of the U.S. growth narrative.’
Unifimoney: How could an investor who’s not ultra-high net worth invest in something like a multi-family real-estate deal?
Reiss: So, there are both platforms and fund managers that you can invest in that allow you to invest, for example, in multi-family real estate deals in specific states or cities. And there the things you’re betting on are very different. You’re betting on demographics, you’re betting on cap-rates, and you’re betting on the ability of the manager. And that’s just a very different bet than betting on the U.S. economy. It’s just another way of diversifying.
Unifimoney: What’s another alternative investment class you’re excited about?
Reiss: There’s one that is currently mispriced because people don’t understand it. Crypto-collateralized lending is an incredibly attractive investment right now because you can get yields between 8–10% on dollars with full liquidity, meaning no lockup. And the relative security of that asset — meaning the risk/reward — is very attractive if you choose the right provider and you understand how they’re managing risk on their side.
People don’t understand the asset class and just associate crypto with scams, and so most institutional players just don’t touch it, because it’s outside of their zone of genius, it’s outside of their comfort zone. And in this case, the analogy is: these are just traditional lenders, but the assets that they’re lending against are cryptocurrencies, which are highly liquid, and, when they custody them, they essentially have full ownership of those assets and they can liquidate them at any time. So, it’s actually a much more attractive asset to loan against than a car or a house or a bond or a business. Everyone today feels comfortable with loans against those asset classes, but I’d actually say they have a less attractive profile than a cryptocurrency.
That’s an asset class that if you don’t have it in your portfolio, I’d highly recommend considering it, and there’s a number of really fantastic providers, who provide a high-quality product and they have a lot of great safeguards in place like the ability to automatically liquidate collateral to protect your investment that makes it very, very low risk relative to the interest that they’re paying.
The ones that I would endorse — meaning that I’ve met the teams personally, discussed their risk-management strategies, and have an understanding of their business — would be: Nexo, BlockFi, and Celsius. All three of those I would recommend and also invest in myself.
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