We often get asked by clients about different ideas they heard from a friend, a new exclusive deal they got invited into, or, most frequently, a specific company or stock that a friend gave them the scoop on. I wish I had a dollar for all the tips I’ve heard about over my 26 years in the wealth management business. The reality is that a lot of the “great ideas and deals” never amount to any real return, and many end up going to zero.
Some of these hot tips involve Venture capital. Basically, this is money raised to support an idea and move it along to the next stage. The hope is that this great idea eventually becomes a reality. The odds of experiencing success are widely debated with venture capital, but most people say that success in 1 deal out of 10 would be a win. This means you must have the capacity to lose a lot in order to potentially make a lot.
Private Equity is often the next area to explore for wishful investors. This is where accredited investors pool money together and inject capital into a business or idea that is starting to show some promise. Eventually, if that great idea actually becomes successful, they may sell it to a larger company who likes what they see, or, on very rare occasions, the idea makes it to an IPO on the New York Stock Exchange or Nasdaq.
Most all of us have heard about someone who hit it big with ONE THING, maybe on a startup like Tesla, or most recently, cyrpto-currency. Perhaps they managed to turn their $25,000 investment into $1,200,000! But, what are the actual odds this could be you or me? How many of us would have had the courage to buy a stock like Tesla at the right time, watch it double or even triple in value and not sell it then for a whopping profit? The only way people REALLY get those returns is if they happen to PICK the right investment, which may have more to do with luck than anything else, and HOLD onto those high-risk investments for a long time. I think the odds are better than 1 in a million or winning the lottery, but FAR worse than 1 in 100.
Investors who want to speculate need to know how much they can afford to lose. This is a conversation I want to encourage you to have with a financial advisor, like me! When I talk with clients who have the itch to invest in something speculative, I typically say, “Assume whatever you put in this bucket will go to zero.” More often than not, this is exactly what happens. If their plan still looks great when the dollars go to zero, then go ahead and risk . . . A LITTLE! If the plan looks terrible or if the client is the type of person who can’t stand losing money, then I encourage them not to go down the “Las Vegas” road.
I generally advise my clients to consider that they may not need to do anything crazy to accomplish all of the things they want to accomplish in life.
If you are presented with some of these great opportunities, please give us a call and let’s have an honest conversation about how it can fit into your overall plan. As my flight instructor told me when I was training to become a pilot, “Keep your eyes on the horizon and wings level!”