You might think my headline is a bit presumptive, but consider the fact that there are roughly 1,100 billionaires in the U.S. With the current population estimated at 340 million, that means there’s a .0003 percent chance that you’re a billionaire. So, okay, I should have written “You’re Probably Not a Billionaire.” But since there’s a 99.99 percent chance that you’re not, I’ll stick with my headline.
But, okay, big news, right? Since 99.99 percent of Americans are not billionaires, why even write that headline?
Because you might be a millionaire. And if you’re not today, you may become one someday. If we remove the value of people’s homes, that leaves an estimated 15 million millionaires in the U.S., which works out to roughly 4 percent of the population. And that’s today. In the future, more people will become millionaires.
By current regulations, once you achieve the threshold of having a million dollars in investable assets, there’s a whole segment of investments that open up to you. Sounds like a good thing, right?
Maybe. There’s a tendency to think that, as a millionaire, you have access to something special not available to just anyone and, because of that, it must be better. Kind of like becoming a member of a country club that you couldn’t afford to join before. Nice, right? Special.
But there’s a reason that Congress mandated a minimum net worth of $1 million for certain kinds of investments. It’s not because these investments are better. It’s because they’re riskier. The idea is that if you have at least $1 million investable assets, then you can afford to lose whatever you put into one of these so-called special investments.
Most of these special investments are not available to the general public. The most common kind that I see is stock in a new company that’s being offered privately.
The first thing to be aware of is that every single startup company trying to get you to invest has a great story. No one is going to talk to you unless they think they can get you enthusiastic enough to put your money into it. So, remember, no matter how good the story is, they all sound good. I have not yet found a way to determine which ones actually are good investments. I have only learned not to be seduced by great-sounding stories.
But more important is this: Whether the investment is a private startup, a private loan, or a private real estate deal, you are at risk of losing every dime. This is the biggest reason that Congress required that only millionaires can invest in them.
Because they deemed that if a millionaire lost all the money they put in a private investment, they’d still be okay. What they didn’t take into account was that some people would put all of their money in a private investment. It was only later, after many tragic stories of people having lost their life savings in private investments, that regulations came about restricting how much of your net worth you could put into this kind of investment.
So, yes, private deals are special, if you consider extraordinary risk to be special.
If you buy the stock of ABC Widgets (a fictional name) on the stock market, and a couple of weeks later you think that you made a mistake, you can easily sell it at a profit or a loss. But if you invest in a private investment, there’s no way to sell it. You’re stuck, for better or worse. And since so many of these private deals are startup companies, consider that startup companies have a very high failure rate.
According to the U.S. Bureau of Labor Statistics, approximately 20 percent of new businesses fail in their first year, 49 percent within the first 5 years, and 65 percent within a decade. In some industries the figures are much worse, with as much as a 90 percent failure rate.
When you invest in a startup, it’s very possible that you are getting in on the ground floor. The problem is that so many fall into the basement. Yes, there are wonderful success stories in America: Apple, Inc., starting in Steve Jobs’s parents’ house, Hewlett-Packard created in a garage, Facebook originating in a dorm room. Wouldn’t it have been amazing to have been an early investor in one of these? Maybe you’d be a billionaire now.
But consider how professional venture capital companies work. They utilize teams of MBAs to comb through thousands of startup companies, from which they choose a very small number to invest in. And even after eliminating over 90 percent of the deals they are offered, only a small percent of the companies they put money in make a lot of money. This business model works if you have a lot of money to invest and a team of experts to help you—and if you are capable of investing in a portfolio of companies in the hopes that roughly 10 percent of those live up to and maybe exceed their promise.
But you are not a billionaire. You don’t have a staff of MBAs to comb through all the private deals out there, and you probably don’t have enough money to invest in a portfolio of these private deals and still be okay if all of them fail, which is a possibility.
During my decades in the financial world, I have heard many horror stories about people making private investments and losing all of their savings. Whether it was with an outright fraudster like Bernie Madoff or just a friend’s startup that failed, the result was the same. Financial ruin.
I am certain that I will hear more such stories in the decades to come. I’m hoping that if you read this, you won’t be one of them.
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, LLC is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to hal@getyourinsight.com. These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.