Does angel or crowdfunding have a place in your portfolio?

In 2012, the government set the path for smaller investors to invest in small businesses.  Most of the reception has been positive, it allows small business to have access to a new investor base and gives those investors the ability to choose whether these investments are worthwhile.

Unfortunately, it has taken a long time for the government to approve and implement the rules.  That said, we are now starting to see some movement and it is increasingly becoming possible for companies to raise money directly from ordinary investors. (Learn more here)

Questions to contemplate:


How much do you really know about the business?

It takes a lot more than a good idea to make a profitable business.  With most deals, you know a very limited amount about the underlying economics.  While you may believe in the idea, you should not underestimate the uncertainty associated with the lack of information.

For it to be worth your while, the company has to grow A LOT

In most cases, these companies are raising hundreds of thousands, if not, millions of dollars.  Venture capital firms that traditionally make these types of investments expect to get a 10X return.  That is what you should expect when you put the chance of an investment going to zero on the table.

How liquid is this investment?

When you make these deals, you have essentially no control.  The company might sell in a couple years, but it could also take 10 years.  Even if you get the 10X return, if it takes 10 years to get your money back that will be less than 10% per year, is that really worth it?

Given these uncertainties, the following should be true for you:


You have a passion

Some simply enjoy the idea of investing in something they believe in and want to see come to life.  They like following the company and it makes them feel part of a cause bigger than themselves.  If this a passion of yours, that is definitely something that should factor into the decision.

Getting nothing back is OK

The general belief is that 1 in 10 of these companies will actually succeed.  Assuming that is the case, the safe assumption is that you will never get your money back.  For that reason, you cannot count on these returns to fund your future financial objectives.  In assessing when you can retire or whether you can purchase a vacation home, you should assume these investments are worth $0.

You can still be diversified

Taking a significant portion of your savings and investing them in a startup is not investing, it is dreaming.  These investments have two primary possible outcomes: You make money or you lose all your money.  This is not something that can easily be modeled or relied upon for your future financial objectives.  As the old saying goes, you should not put all your eggs in one basket.  It applies here in spades.

Your Financial Plan Doesn’t Have to be Accurate to be Useful

With the passage of the 2015 Budget, congress eliminated many of the filing strategies that financial planners have been implementing for years.

The most popular strategy, “file and suspend”, applied to married couples and allowed the primary earner to file at 66 and then immediately suspend their benefits until 70.  Their spouse could then elect to receive their “spousal benefit” while, at the same time, deferring the benefit earned from their work history until age 70.

For couples with high incomes, this could result in an increase of over $100,000 in total Social Security benefits.

I plan to write a post about how one should think about this change, but right now I wanted to highlight some thoughts regarding the financial planning process that came to mind upon hearing this news.

Because it is seemingly impossible to make accurate estimates, many people write-off financial planning as a waste of time.  In many ways, they are right, the process is riddled with uncertainty!  However, we should not be so quick to discount the value of the whole process.

Your financial plan is an estimate

When we start a plan, we dive deeply into every area of your financial life.  We look at budgets, tax returns, model future bonuses, project future spending, etc.

We make a lot of assumptions.  Yet, it would be wrong to substitute specificity for accuracy.  Getting into the weeds is more effective at identifying areas of financial weakness than achieving scientific accuracy.   Of course, we should still try to be accurate, but it is equally important to acknowledge the uncertainty of the whole process.

As we see in the case of Social Security, one congressional vote can cause a need to rework the numbers.

Estimates still matter because they are relative

Over the years, many clients have taken advantage of this loophole.  How did we decide what to do?  Well, we made estimates and then compared them.

In economics, there is a Latin term that comes up a lot, “ceteris paribus“, meaning “holding all else equal”.  Assessing the impact of one change, while simple, can be exceedingly meaningful.

In fact, this is how financial planning can actually be used to drive decision making.  As long as the relative benefit of a decision can be estimated, then we can decide what to do without having to rely on the accuracy of the whole model (within reason).

Financial planning is not just about how much money you will have in retirement.  You can use it today, no matter what stage of life.

Let’s review a simple example, should you save $20,000 more this year?

Without doing any analysis, we know that you will have a better chance of reaching future financial goals.  If we do a little number crunching, we could also get an estimate of how big a difference this could make. We could even compare it to other possible choices like: (1) only saving $10,000 or (2) saving $30,000 in 10 years.

Similarly, does the recent change in Social Security cause our entire financial plan to be worthless?  Absolutely not, in fact, it serves as a great time to review the plan, make a few changes and see what’s different.

Use your financial plan as a guide

If your financial reality has changed or your approaching a financial decision then you should be looking at and updating your financial plan.  The days when a financial plan was a 100 page document that only explained when you could retire are over.  Financial planning can be applied to any decision.

Money is an emotional topic, having some data as a frame of reference can be an invaluable tool.  Don’t be scared off by imperfect information.