I Tried Beating the Market With Startups—An Index Fund Would’ve Crushed Me
Disclosure: This article shares my personal experience and opinions and is not investment advice of any sort.
TL;DR: Over ~5 years, my private equity (PE/venture-style) bets returned about 27% after fees—far below what a basic, low-cost index fund would have delivered. That gap came from fees, liquidity drag, power-law math, and valuation lag. I accessed deals through widely used, regulated online platforms that many readers will recognize, but access alone didn’t overcome the structural headwinds. Today, my core sits in broad index funds, with a capped “satellite” sleeve for private deals. For downside discipline, sentiment/risk analytics like MTT have been the difference between storytelling and risk management.
The Experiment: Five Years Chasing Early-Stage Upside
The Setup (Confidential Holdings)
I built a basket of early-stage tech startups—most opportunities sourced from regulated online venture portals available to individual investors. Placement amounts, after-fee basis, and estimated valuations were tracked at the time.
I’m keeping names of the holdings confidential unless a company’s details were already made public on consumer-facing portals; the point here is the outcome, not the roster.
The Result
Across the portfolio, my after-fees performance came in near +27% over roughly five years. That might sound fine—until you stack it against a broad, low-fee index fund over the same window. A “boring” index compounded faster, with daily liquidity and minimal costs, over ups and downs.
Why My Startups Didn’t Beat the Market
1) Valuation Lag & Dilution
Private marks update slowly and often optimistically, especially between funding events. Follow-on rounds can dilute early checks. Public indexes price continuously; private deals don’t.
2) The Power-Law Reality
In early-stage investing, a handful of outliers drive most of the returns. Miss a couple of those unicorns (or get diluted on the way), and your median outcomes look pedestrian next to an index.
Notice how the biggest returns are gained from diversified indexes, and the highest of the rest is the “Developed Markets” fund?
The same concentration rule is true for the majority of losses. My largest loss, in a UX design firm known as InVision, suffered a total loss in FY 2024, for a full after-fees placement of $9,000.
Reasoning for this has always been vague, best I can tell, is that they expected to be acquired by Adobe, coasted a bit too early, burned through their runway, and found 2023 – 2024 too hostile to raising capital- and thus failed. Or at least, failed on their obligations to PE holders but still technically are in operation.
This did create a healthy tax refund check in the 2024 tax year, if that is any consolation.
3) Fees & Friction
Even modest platform or fund fees compound against you. Add carry structures and transaction costs, and the hurdle climbs. Index funds set the bar brutally low on fees.
4) Liquidity (or Lack Thereof)
Illiquidity blocks rebalancing. When public markets dip, you can harvest losses, rebalance, or redeploy quickly. With private deals, you wait, including to zero.
5) Narrative vs. Numbers
Tech stories are seductive. But conviction built on headlines isn’t a substitute for a portfolio that compounds—especially when the benchmark is a low-cost index fund with thousands of revenue-producing companies.
“But Startups Are Volatile—Shouldn’t Volatility = Higher Return?”
Not necessarily. Volatility is risk’s symptom, not its reward. Without repeatable selection, position sizing, and follow-on discipline, volatility just widens your outcome range. Over my window, it didn’t translate into higher returns versus the market; it increased the chances of drawdowns and dead money while the index quietly compounded.
The Elephant in the Room: Private Equity in your 401(k)
This comes across as awful rich coming from me. (Pun intended.) But even after my own lessons learned, I’m still not convinced putting private equity inside your 401(k) is a good idea.
This is not investment advice, you can do what you like and I am not your registered internet investment police to tell you what’s a good idea or not.
But for most unsophisticated investors, or unsophisticated passive advisors that run most 401(k) funds, this stinks to me.
Here’s the quick recap and reality check:
In 2020, the U.S. Department of Labor (DOL) said 401(k) menus may include a diversified option (like a target-date or balanced fund) that has a small private-equity sleeve, not a standalone PE fund that participants pick directly.
Fast-forward: In August 2025, President Trump signed an executive order directing the DOL and SEC to make it easier for plans to consider “alternative assets” and to revisit that 2021 caution. The DOL then rescinded an earlier2021 supplemental statement of caution against over-concentration.
Plans still have to meet ERISA’s prudence and loyalty standards, and any PE allocation must be analyzed for fees, liquidity, valuation, benchmarking, operations, and participant communication.
In other words, even with the new posture, it’s only permissible where the math and governance are genuinely up to the task.
Bottom line: The door is more open than it was, but it leads into a room full of complexity. For most savers, a low-cost, fully liquid index core still does the heavy lifting; sprinkling private markets into a 401(k) requires institutional-grade diligence to avoid turning retirement savings into an expensive experiment.
Those of us who remember 2008 will know, the so-called amazing investments that were Mortgage Backed Securities, rated Triple A and yet yielding impossibly high amounts, shattered and desiccated millions of pension funds and 401(k) balances.
Not often stated, and a hot take for you: the fund advisors who did this were not at fault for the meltdown that happened.
Before you get out your pitchforks- consider that the fund advisors are legally obligated to put their funds in the best risk/reward tradeoff, as defined by the standardized credit monitoring solutions.
Sadly, the MBS’s showed all green, so if they had instead invested in US Treasurys or similar, their depositors could probably have successfully sued them for mismanagement in buying equally rated securities with worse payoffs. I suspect something similar will happen with Private Equity.
What Actually Helped: MTT’s Risk-First Playbook
Best-in-Class Downside & Black Swan Protection
Where “moonshot” thinking stumbled, MTT excelled: stressing portfolios for tail events, capping black swan/crash exposure, and enforcing kill-criteria before narrative bias took over. In practice, that meant smaller drawdowns and faster recovery paths.
Sentiment & Risk Analytics
MTT’s signal stack translated market mood, crowding, and fragility into position sizing, not storytelling; so risk budgets stayed intact when hype ran hottest.
Public-Facing Returns & Transparency
Instead of hero narratives, I leaned on visible, trackable return streams with clear drawdown math. That shift was worth far more than hunting “the next big thing.”
The Index-First Portfolio I Wish I’d Started With
Core-Satellite Structure
- Core (70–90%): Broad, low-cost index funds/ETFs for equities and bonds.
- Satellite (10–30%): Capped allocation to private deals or thematic tilts, funded only after the core is in place.
Position Sizing & Follow-On Rules
Small initial checks; clearly defined follow-on criteria; hard caps per issuer; written “kill switches” for black swans and breakouts down.
Fee-Aware Diversification
Compare total all-in costs (platform + fund + carry). Favor structures with clean economics and investor-friendly liquidity.
Liquidity Planning
Keep a public-market buffer for life events and rebalancing. Don’t let a private position force bad timing elsewhere.
Actionable Playbook (Save This)
- Write your objective in one sentence (growth, income, capital preservation).
- Fund the core index allocation first.
- Pre-commit to a max % for private deals.
- Diversify by vintage (stagger commitments across years).
- Define follow-on criteria now; don’t improvise later.
- Log every fee; review annually.
- Rebalance on a schedule, not on vibes.
- Document each lesson learned—then actually act on it.
But these results take time, which is why MasterTradeTools has developed a zero effort, registered and compliant framework for doing it- transparently and without requiring anything from depositors.
We aim to be the first user custodial and fully transparent active trading firm, registered and compliant with roboadvisor regulations, engineered by master hackers and computer science professionals to manage our own portfolios.
Our live results can be found here:
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FAQs
Do private deals usually beat index funds for individual investors?
Sometimes, but not reliably. The power-law means a minority of deals drive most gains; access, fees, and dilution make consistent outperformance hard. My results didn’t beat a simple index.
How do valuation lags affect ROI?
Private valuations update sporadically. Paper gains can evaporate, and stale marks can mask risk. Until there’s a liquidity event, your “return” is an estimate.
How much of a portfolio should go to private deals?
Consider 5–20% as a cap for higher-risk sleeves, depending on your risk budget, horizon, and liquidity needs. Fund the core first.
Can tools like MTT actually reduce drawdowns?
Risk-first processes—stress testing, sentiment/risk analytics, and kill-criteria—help cut left-tail risk and recover faster. That’s where MTT has stood out in my experience.
What fees should I watch for on venture platforms?
Platform fees, fund management fees, carry, and transaction costs. Model them annually and over your expected holding period; compounding fees can dominate outcomes.
Conclusion
The startup story is thrilling—but compounding wins. Over my own five-year window, early-stage private picks underperformed a plain index fund after all the fees, dilution, and liquidity friction. Today I build around low-cost indexes, keep a disciplined satellite for private bets, and lean on risk analytics (like MTT) for true downside control. That’s not as exciting as unicorn hunting—but it’s a lot better for sleeping at night.
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