Many of you reading our blog probably know that investing your money is a critical component in growing your wealth. The typical investments people think of are stocks, bonds and gold. What is commonly overlooked are the many lesser know investments such as fine art and startups just to name a few.
Today, we will be focusing on why investing a small portion (less than 10% of your portfolio) into less common investments such as startups and private equity can be a good idea.
A common statistic when it comes to startup companies is that most startups (90%) fail (https://www.forbes.com/sites/neilpatel/2015/01/16/90-of-startups-will-fail-heres-what-you-need-to-know-about-the-10/#e63004766792). But, even though that is quite a scary statistic, there are still reasons to consider investing in startup companies.
First, because startups are highly speculative, you should never invest more than you are wiling to lose. But, why invest? With an average of 26% average IRR (https://crowdwise.org/data-analysis/equity-crowdfunding-returns/) over a 30 year period, there is plenty of potential to be had. The key thing here as with any investment is to diversify. There are so many new ideas and innovations that come to the market, but know one truly knows which one will become a market leader or even profitable.
When we take a look at Uber, who would have know that it would grow into one of the biggest ride sharing companies (albeit still losing money so who knows if it will actually be successful). If you had invested in another ride sharing company you might not have done as well considering Uber has now gone public.
Buying into multiple companies after doing due diligence with their financials and growth strategy will help lower the risk of losing money because startups are typically a go big or go home play.
The same ideology goes with private equity investments. But, with private equity, you typically buy into a firm so make sure the firm you plan to invest in has companies that you are interested in. Most businesses in are private businesses so there is a huge pool of opportunity and when looking at the small to middle market firms, they can have some astonishing growth.
Both private equity and startup investing are risky with the latter being the riskiest. Your money will typically be held up for at least 5 years so there is a large illiquidity risk. But if you have the time to wait it out and are willing to do your due diligence and diversify, the rewards of investing in these alternative assets can be quite rewarding.