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“The stock market is obscenely overvalued, this is a bubble.” – Seeking Alpha, Q2 2016
Everyday investors are hearing news like this from every other channel. The S&P 500’s PE ratio is at 24 times earnings that is over 70% higher than the average over last 10 years. Add the uncertainty caused by the latest Brexit from EU and the news about legendary investors such as Warren Buffett, John Paulson and George Soros shedding equity portion of their investments and stocks may not be an attractive asset class in near term for everyday investors.
On the other hand, inflation is still low and the so-called “jobless recovery” is still hurting many American workers and the GDP growth is well below robust 3%. Additionally, the repercussions of the latest Brexit from EU clearly pose a threat of a near term slow down in the US economy. As a result, the likelihood of significant hike in interest rates in near term seems very low. Sustained low interest rates in near-term makes bonds a less attractive asset class for everyday investors.
What about real estate? In a non-bubble environment, typically, the growth in home value and growth in rents are correlated. However, in most major markets in America, the home values are growing significantly faster than the rents (see graph below), which is an indicator of a housing bubble. So, in near term, real estate is not a very attractive asset class for everyday investors.
Source:Professor Sergio Rebelo, Kellogg School of Management @ Northwestern University
Since the beginning of 2016, the investments in startups have slowed down dramatically. Not a single company went IPO during Q1 of 2016. Typically, there is a strong correlation between the IPO market and the sentiment of the VC’s (Venture Capitalists) and traditional angel investors. As a result, the startup investment has slowed down from these traditional investors and the valuations have come down significantly. There is no shortage of good ideas, entrepreneurs and companies but they are struggling to secure capital they need to build and grow their businesses.
Traditionally, everyday investors never got an opportunity to invest in the next Facebook or the next Google as they were not accredited investors and their smaller size of investment did not allow them to participate with the traditional wealthy group of investors. They also did not have access to the startup deal flow since the only channel for entrepreneurs to get funded was via wealthy angel investors or Venture Capitalists (VC). However, the Title II of JOBS Act of 2012, enabled 9 million new investors to participate in startup investing and the Title III of JOBS Act that was passed in October 2015 opened it up to hundreds of millions of everyday Americans.
Equity crowdfunding has made startup investing a more level playing field as it enables the information, deal flow and ability for everyday investors to invest in early stage startups. During times of inflated domestic asset classes, everyday investors can find opportunities to invest smaller sums of money in emerging startup companies and be part of the next big thing while helping the entrepreneurs realize their dreams.
(Disclaimer: This is a guest post submitted on Techstory by the mentioned authors. All the contents and images in the article have been provided to Techstory by the authors of the article. Techstory is not responsible or liable for any content in this article.)
Image Credits: entrepreneur.com
About The Author:
This article was contributed by by Narendra Patil, founder of StartupWind. StartUpWind is an Entrepreneur’s Social Network that helps young entrepreneurs realize their dreams and bring their raw ideas to life by connecting them with like-minded peers, successful alumni, mentors and their capital.