I’m in my early 50s and have been investing since my first job out of college. While I was an employee, I maxed my 401k and invested aggressively in the market early. With age, I shifted to a less aggressive strategy with my IRA. Eventually I started my own companies. Over the years, I invested in numerous alternative investment types, some good and some bad. The money I invested in my 401k had its ups and downs with the market. However, in the long run, I feel incredibly good about how my money performed there. Other investments – well I wish I would have passed on some.
Individual Private Businesses
Clearly, the risks involved with investing in private business, particularly startups, are much higher than a diversified portfolio of market equities. That said, it can be extremely tempting to invest your money in private businesses. When you get in on the ground floor of a business, the return can be exponential.
Actively Managed Business
First, I’ll speak about my experience investing in individual private businesses. For simplicity, I’ll categorize these investments into two buckets. The first bucket includes businesses in which you are actively working in or running the business. I have started multiple businesses. When you are on the inside, you know everything about the business you are getting involved in. You are making a bet on yourself. A lot is riding on you. You know the opportunity and know all the risks. The businesses in which I have been actively involved in the day-to-day operations have paid off the largest for me. I had a lot of ups and downs and things weren’t always easy, but I have zero regrets with these businesses.
Passive Business Investment
In the other bucket, there are individual businesses where you are purely an investor. These are businesses where you are not involved in the day-to-day operation of the business. These investments can be attractive because of the promise of huge returns. Even better, they promise passive income. This means your money is working for you instead of vice versa. You need to be vigilant and carefully conduct your due diligence before participating in an investment like this.
Unfortunately, while some of these investments have worked out for me, many of them failed to deliver the level of return I expected. Some failed completely, and I even had one that was fraudulent and a 100% loss. As a result of my experience, I advise a lot of caution when investing in a one-off, private businesses. They can be great investments, but the risk is extremely high and you should only invest money you are willing and able to lose if things go wrong. It’s especially tricky when you invest with friends. Investing with a friend risks affecting your relationship with that person if things don’t go the right way. This type of investment can be excellent but be careful or you may end with great regret.
Diversified Private Business
Then there are more diversified investments you can make in private business. As an example, I have invested in a venture capital (VC) fund. This type of investment is risky because they invest in smaller, more nascent, unestablished companies than you will find in those that are publicly traded. VC funds are usually run by a group of experienced financial experts. These experts find and purchase shares in private companies that have great potential. Sometimes the VC fund managers will be integrally involved in helping those companies to grow. The key is to invest in a fund with a smart team that has experience and a resume of success. A quality VC fund should have a diversified risk portfolio selecting companies of different sizes and maturities. Fortunately, I picked a good VC fund and have had a good experience so far, but it’s too early to fully evaluate.
Fixed Income Investments
Other than that, I have invested in multiple different types of fixed income investments. As with the other investments, there is an inverse relationship between risk and return. You can invest in government bonds that provide small returns or corporate bonds that offer much higher rates, but carry higher risk.
Conclusion
I didn’t touch on some other types of investments like real estate, but I am speaking from my experience. I believe all of these I discussed can be effective. The decision on what you choose needs to be made in context with your age and level of investment. A diversified market investment in a 401k or other IRA vehicle and is a great strategy for a new investor. It can be effective all the way through to retirement. The riskiest investments I discussed provide the most return. However risky investments should be reserved for people who have money they can afford to lose. I also think a good financial advisor can be vital in guiding you through all the stages of investing. Good luck!
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