Block Woman gazes at a jumble of wires and circuit boards. Above Block Woman's head are 2 exclamation marks and 2 question marks.

We work with plenty of clients who, at an enviably young age, already have a portfolio worth millions of dollars. (Thank you, IPOs.)

Some of these clients are all, “Cool. Let’s just keep doing that ‘invest all my money in a diversified portfolio made up entirely of low-cost, broad-market index funds’ thing.” Check. We gotchu.

None of these clients is “Put it all in crypto and let’s ride, baby!” I’m sure people like this exist (I’m on Twitter, after all), but such folks wouldn’t choose to work with us (or vice versa) once they see our website or any of our writing on investing.

A few of these clients definitely want to dip a toe (or even a whole leg) into the more exciting waters of investments: crypto, angel investing, rental real estate, venture capital, individual stocks, quasi hedge funds, etc. 

I am here today to say: You don’t have to. You really don’t. You can keep your investments really simple, whether you have $100k or $20M to invest. If you have enough wealth, you can afford to. But you don’t need to.

Please note: I hope it is obvious that I don’t know you or your finances, and therefore there’s always a possibility that your specific circumstances make it more appropriate for you to invest your money in something other than a low-cost, broadly diversified portfolio of publicly traded stocks and bonds.

Fancy Investments Wealthy Clients Have Invested In

For the most part, our clients want to own a boring, low-cost, broadly diversified portfolio as the primary way of growing and/or protecting their wealth. They understand that approach. They feel comfortable with that approach. They want to spend their time and worry focused on something other than arcane investments.

That said, many of them have at least some money in “fancier” investments, such as:

  • Individual stocks, usually at Robinhood
  • Company stock, which has accumulated, sometimes intentionally and sometimes by inertia
  • Cryptocurrency, either at Robinhood or Coinbase. One client even at FTX. 😬
  • Titan, which, among other things, allows you to invest in a hedge-fund-like way (at much lower cost than a traditional hedge fund)
  • Angel investing, most often, though not exclusively, through “alumni” groups from a former employer, like Uber and Airbnb
  • Rental real estate, often by way of moving to a new home and keeping the old one as an investment
  • Opportunity Zone funds, usually when they have a big pile of company stock that they want to sell out of…but not pay the taxes on the gain (at least, not yet, and not as much)

Challenges of these Fancier Investments

What’s the problem with investing your money in any of these things?

None of them is inherently bad (although I still personally have my doubts about crypto, more on that below). It’s possible to grow wealth this way.

The problem is that they’re more work or higher risk or more like straight-up gambling than you might realize. If you don’t realize that and go in anyways, then they’re “bad.”

What challenges might you encounter with these “fancy” investments? I list several below. Not all challenges apply to all these investment choices.

I hope that, before making any fancy, complicated, or exciting investments, you ask yourself if your fancy investment opportunity faces any of these challenges. If the answer is Yes, then also ask yourself how you’ll respond to that challenge.

It’s not diversified.

You know what’s great about a Total US Stock Market index fund? It owns a bit of every publicly traded company in the US. If one company does poorly, oh well! You have the other thousands to counterbalance it. Diversification is described as “the only free lunch” in investing.

Whereas if you invest in a single stock, or a single (or even three) rental homes, or a narrowly targeted fund, if that one company or one home or one narrow sector of the economy does poorly, you’re screwed.

It’s illiquid.

That is, you can’t turn the investment into grocery money tomorrow. Nice thing about owning publicly traded stocks, ETFs, or mutual funds? You can sell them today and have your cash tomorrow (or at least, in 2-3 days).

Real estate, angel investments, hedge-fund-y investments, and any other sort of private investment can tie your money up for months if not years. You either cannot get your money out at all, or you have to pay high fees to do so.

This isn’t necessarily a bad thing. You can even, in theory, earn more money due to having to suffer through illiquidity: it’s called the liquidity premium. But many a person has put money in an investment without actually knowing they can’t get it back out for years…and then they need or want it back before then.

Also, often when investments are illiquid, there’s no good way to know they’re really worth. Consider a rental property (or your own home), both illiquid assets if ever there were one. Sure, you can look at Zillow and see a price there. But you don’t know what it’s truly worth until you actually go to sell it. A publicly traded stock, on the other hand? You go to the internet, it’s worth $30, and you can sell it right then and there for pretty much $30.

It’s expensive to buy and expensive to own.

Hello, real estate. Not only do you have closing costs that can reach up to 5% of the total price when you buy and 10% of the total price when you sell, but you also have maintenance costs, property tax, insurance premiums, and mortgage interest (unless you escaped having a mortgage) every year along the way.

One of our clients has owned a rental property in the Seattle area for several years. They spent several years getting steady rental income. It was great! And then in 2023 the rental market dried up, and they spent the last year not earning anything on it, but still needing to pay its expenses. That doesn’t mean it has been a bad investment, but it’s a heck of a lot harder to own and analyze than publicly traded stock funds.

For another example, “fancy” mutual funds can cost well above 1% per year. Those costs add up significantly over years.

If you ever owned stock in our company when it was private and sold that stock in the private secondary market (we had several clients do that in the years before Airbnb went public), you will perhaps recall the cost of that transaction. You can sell public stock on the public stock market for free, literally. But if you sell it in the private market, the firms that facilitate those transactions (ex. ForgeGlobal) were charging up to 5% each to the buyer and seller.

It’s an “opaque” market.

In the public markets (an S&P 500 fund is probably the best known example of trading public stocks), the company’s financial information must be provided to shareholders every quarter, and the books must be done according to legally defined accounting standards. It’s transparent.

Private markets and companies have far fewer requirements and therefore you often can’t reasonably rely on the information from them to make a well-informed decision. 

It lacks inherent value.

Owning a stock means owning a part of a company that earns money, and you own a share of future earnings. Owning a bond means giving a loan to a company or a government, often to grow the business or pay for public projects, respectively. The company or government entity must pay back that principal to you, plus interest along the way. There is inherent value in both stocks and bonds because it’s connected to a real entity doing real things.

For all the (relentless!) hype and talk of revolutionary new functionality (and growth!) in crypto, I still don’t see how it’s connected to anything of inherent value. Do you? Or do you just see Number Go Up Rocket Emoji Rocket Emoji Moon Moon Moon and want to get in on that? 

You don’t have the skills to evaluate the investment.

There are investment professionals who evaluate investment opportunities (both public and private) all. day. long. They have degrees in finance and investment designations.

In fact, the lovely boy I grew up next to (to be clear, he’s currently a full-grown adult and intends to stay that way for years to come) has spent his entire career in investing: from MIT to Goldman Sachs to a hedge fund to a hedge fund he founded to managing a portion of a university’s endowment. If anyone is, he is equipped to pick and choose among companies to invest in.

And even then, in his current job for a university endowment, he is asked to pick and choose only a certain kind of investment (maybe it’s public US companies? I forget). Other people on the investment team are responsible for the other categories of investing, like private companies, real estate, etc. 

When you make an angel investment, or choose one individual stock over another, or choose cryptocurrency over public companies, he and a lot of people just like him are on the other side of that trade. How do you think you stack up? What equips you to make that evaluation better than him and his peers?

Might sound a bit rough. And hell, for all I know, you actually do have good reason to think you can do the analysis better than those folks. It’s possible, just not very likely. I also recognize that it is very easy to be swayed into thinking a fancy investment is a good idea if you are surrounded by colleagues or internet friends who are constantly touting its merits.

Why Are You Investing in This Fancy Investment?

I’m not categorically against any of these investments, especially not if we’re talking about a small (< 5%) part of your investment portfolio. But given all their risks, let’s make sure you’re putting your money in them for good reasons.

Do you think you’ll get higher returns?

One nice thing about public investments is that it’s really easy to get historical data on rates of return. We know that the S&P 500 has gotten a little over a 10% average annual return since 1957. Investing in non-public “spaces”? Way harder to get reliable, robust data.

I asked around specifically around angel investments, because so many of our clients have put a little money into such investments. Smart finance professionals, even those with direct experience in that space, say it’s really really hard (nigh impossible) to come up a reliable answer to the question “How much do angel investments return to an average investor?”

Real estate has historically returned less than the US stock market.

In any investment, you might get higher returns than just plain ol’ owning the stock market at low cost, but that’s because you’re risking that the investment will lose some or all of its value. Do you need more money to live a meaningful life? Or do you have enough now?

As the old saw goes, “If you’ve won the game, STOP PLAYING.”

Do you think it’ll provide some of that sweet sweet “passive income”?

You know what’s the most passive-est of income of all? A broadly diversified portfolio of stocks and bonds that you can simply sell a bit of when you need cash.

Rental real estate can provide both appreciation of the property and rental income along the way. But if you want passive income, then you can’t be managing the property yourself. And if you therefore hire a property manager (even if they could do 100% of the work, which I am reliably informed they cannot), that rental income is going to be way lower.

Is it fun or exciting?

The notion of an “exciting” investment is terrifying for most investment professionals. It’s usually associated with a gamble, not a true investment.

So if you’re making an investment just to see what happens—hell, it could moon emoji moon emoji moon emoji, rocket ship rocket ship rocket ship—but without it fitting into any solid investment “thesis” or philosophy…please just keep it to under 5% of your total investment portfolio and know what you’ll do if it loses a lot of value.

Many of our clients make “fun” or “let’s see what happens” or “I just want to support a former colleague’s new venture” investments. That’s cool! They also make those investments as a very small percentage of their total portfolio, which helps keep it “fun” and not “terrifying.”

A Broadly Diversified, Low-Cost Portfolio Is About as Passive and “Likely to Get You to Your Goals” As Possible

Your “best bet” (in the colloquial sense, not in the sense of any sort of guarantee that would most certainly land me in hot water with the guv’ment) when investing your money is to “bet” on the totality of the global and especially US economy to continue to innovate and grow over time.

You make that bet by simply “owning” those markets, and cheaply. This means low-cost, globally diversified funds.

My favorite story about this concept is still the one about the guy who manages the Nevada state pension. I talk about it here. The $35B (in 2016) pension fund was managed by One Dude. Who packed his own brown bag lunch. And invested everything in low-cost index funds.

(By contrast, check out this unfortunate story about the folks who manage the California state pension (CalPERS), which definitely did not follow the simple, low-cost approach. And their investment results have been disappointing.)

If you’re doing something different for your presumably-less-than-$35B portfolio…why? Don’t tell me. Ask yourself. And I hope you’ve got a strong answer.

If you agree with this investment philosophy and want to work with a professional who can help ensure that you hew to it (don’t get dragged up, down, and sideways by temptation or fear), please reach out and schedule a free consultation or send us an email.

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Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Flow Financial Planning, LLC, and all rights are reserved. Read the full Disclaimer.

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