Tuesday, October 19, 2010

Tier 6: Exotic Investments

An Angel investor is someone who provides financial backing for small startups or entrepreneurs. They are usually the first round of financing of any business. That is they are the first ones to invest and they invest when the business isn't even off the ground. When it's just an idea. I have seen an Angel investor $10,000 in dozens of dozens of businesses and get nothing but ownership in worthless companies that die almost as fast as they were born. If this was the Angel investors retirement plan they would be broke. It's a good thing that most Angel investors are very wealthy, as they should be.

I have a friend and associate that helped people invest in real estate during the real estate bubble. The investments were "sexy." It's always the sexy investments that attract people because you can make a lot of money in a short amount of time. You can also loose a lot of money just as fast. During the real estate boom, normal people thought that the odds were better than they were. "Wanna be" investors found themselves making a lot of money easier than they should have. They also found themselves loosing it come the crash. If you're not ready to loose that money, really just throw it away, then you shouldn't invest in "sexy" or exotic investments.

The last tier of investing is Exotic Investments. Exotic Investments are any type of self managed investment including trading accounts. Exotic investments include but are not limited to: real estate, currency, commodities, private businesses, art, coins and antiques.

I have used an analogy about collecting Polo shirts. If I had a closet filled with every different kind and color of polo shirt, all I would have is a diversified collection of polo shirts. I use that analogy as an example of how someone shouldn't diversify. However, if I an expert on polo shirts, if I had studied polo shirts my entire life and knew them in and out, then it may be riskier for me to try and diversify with stocks and bonds. It may be wiser for me to invest more in polo shirts. Exotic investments are the same. If you have a special knowledge of commodities or real estate, then it may change the risk involved with those kind of investments. By changing the risk it may change the order of the tiers for that specific asset class.

No matter what your situation, you should always consider your risks before investing. When it comes down to it no one has a better opportunity to know your risks like you.

Saturday, October 16, 2010

Tier 5: Managed Accounts

After you max out your retirement accounts like your IRA and 401k, the next step is to invest in accounts that do not have tax advantages. Some of the risks are the very same as your 401k and IRA. Some risks are additional. As always you should invest in Tier order (1-6). There are numerous places to open these accounts. Self managed accounts can be opened by ING Direct, Zecco.com, Scott Trade, and ETrade. I recommend Zecco for more actively managed accounts, and ING Direct for an automatic investment account. Both offer reliable service and very inexpensive trading. However, I would not recommend a self managed account unless you have been educated by yourself or others, and you can afford to loose the money you invest. Self managed accounts can be extremely risky.

Probably the easiest way and safest way to contribute to managed accounts is to get and financial advisor. Ironically it's not easy to find one. First of all don't pay someone a consultation fee. Second most financial advisors get paid by assets under management. That means they get paid a percentage (usually close to 1% depending) of the assets they are managing each year. It is important that you know so that if an advisors seems hesitant to allow another advisor to manage some of your money, greed is a possibility. Third, consider multiple advisors and multiple strategies. Take the time to interview multiple advisors. Ask about their strategies and philosophies. Ask your friends and family who they use. Most importantly find someone you trust.

This is not something that you can take lightly. There are many different advisors and many different types of strategies. Some strategies are better than others. It's hard to know what best and who is best. More often than not the difference between two advisors is a matter of good and better, not bad or good. That is why I recommend interviewing multiple advisors and finding someone you trust.