America is in the middle of a retirement crisis. Seventy percent of retirees are worried they don’t have enough money and wish they’d started saving earlier. Even worse, 30% are considering going back to work, because their savings could soon run out. At a time like this, both current and future retirees are counting on their investments paying off.
In August, President Trump issued an executive order that helps savers by expanding Americans’ access to private markets through their 401(k)s, making an asset class that’s long been used by public pension funds and wealthy families more easily available to everyday investors if they so choose. If you were to rely solely on media coverage in recent weeks, however, you’d be left with the impression that expanding options for families and workers is a net negative. In fact, nothing could be further from the truth.
A new report from my organization, the American Investment Council, found that over the long term, private equity as an asset class continually and consistently outperforms the broader stock market and other popular investment categories. This is exactly why investors should be offered the option to invest in private markets. It’s also why, beyond wealthy investors, public servants – including millions of teachers, police officers, and firefighters – have long relied on these investments to keep their pension plans fully funded.
We analyzed the rates of returns across all of private equity, then compared it to returns from other popular asset classes. Our biggest finding is that over 10 years, private equity beats every other major asset class. For instance, private equity’s returns beat the S&P 500 by 3%. That margin makes a huge difference for workers and families over the long haul, giving middle-class investors the higher compounding returns that can deliver their retirement and savings goals.
To put it in perspective: if you invested $25,000 in the stock market over 10 years, with compounding you could expect a return of $85,618; in private equity, that same amount compounded would return an estimated $111,720 – a difference of more than $26,000. Over a 5-year window, private equity remains the market leader, with a nearly 2% higher rate of return than the S&P 500. Crucially, these returns are after fees—dispelling the myth that investors end up paying hidden costs. They don’t.
Media coverage tends to ignore the long-term nature of private markets while over-indexing on the short-term realities of investing. Every kind of investment and asset class has ups and downs. The stock market has good years and bad years, but Americans still invest billions of dollars amid the see-saws. The past year has been especially good for top stocks, with annualized returns of 25% in the S&P 500 compared to private equity’s nearly 10% returns. But private equity isn’t focused on single-year returns. It’s focused on the same thing as most everyday investors: The long-haul. On that key score, private equity’s returns are significantly higher.
This is exactly what everyday investors need from their 401(k)s: consistent, steady, and substantial growth over decades. That’s especially true as investors confront the retirement crisis. We’re talking about people who are saving for golden years, their children’s education, and other financial needs that are far down the road. They usually aren’t focused on the volatility of a year or two. They’re taking a longer view of one or two decades, if not longer. If middle-class investors are showing such fiscal wisdom, why aren’t pundits and other critics?
The critics also ignore that investors aren’t looking to pile every penny into private markets in a “one-size-fits-all” approach. They simply want the option to invest a portion of their portfolio in asset classes that offer upside to traditional equities, in a way that works for them. Many will choose target-date funds that get more conservative over time.
And Americans want access to more options after seeing their choices in the traditional equity markets decline for years. The number of publicly traded companies has fallen by over 50% in the last 30 years—from 8,800 to less than 4,000 – as more companies choose to stay private longer or leave the public markets. By investing in private markets, middle-class investors will be able to diversify their portfolios and get more exposure to successful private companies. This is the definition of investor prudence. It should be praised and encouraged, not second-guessed or stifled.
President Trump is right to expand middle-class Americans’ access to private markets, and the critics are wrong to argue against more sound choices for savers. The evidence is in: Private equity is the kind of diversified, highly profitable investment that Americans should be able to choose as they think about their futures. Private equity hasn’t peaked at all, and it’s an essential part of solving our country’s retirement crisis.
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