Successful people, especially those in high-profile jobs or lucrative professions, are frequently approached about “investment opportunities.” The investment opportunity could truly be a great investment or it may be a losing proposition. How do you gauge if this opportunity is a good investment for you and your family? This article will highlight some items to consider as part of your assessment.
Consider Motive
What is your relationship to the contact presenting the investment opportunity? Typically, people will be more trusting of a close friend or family member, but due diligence should still be performed. What experience do they have in this area of investing? If they have little or no expertise regarding this type of investing, their recommendation may be less valid. What benefits might they receive if you invest? They may gain direct compensation or social capital by persuading people to invest. Do you feel like the contact is looking out for your interests? Are your interests aligned? Some individuals and firms act as fiduciaries, meaning they are required to put your interests first. Ideally, if the investment performs well, you both benefit, and your interests align.
Check for Fit
Examine your existing portfolio of assets and reflect on your goals. Would this investment opportunity complement your existing pool of assets? If the portfolio already has a substantial weight to a particular asset type, buying more could reduce portfolio diversification and increase risk. Will this holding help or hinder the achievement of your specific goals? For example, buying vacant land with hopes of selling at a profit many years from now may not be ideal if regular cash flow is needed from the portfolio.
Test for Reasonableness
You should receive offering documents, financial projections, or other reports to review as you decide. As you review the numbers, do they look reasonable? Projections that sound too good to be true likely are. Pay close attention to the assumptions being made and what conditions would have to exist to reach those results. The projections should be grounded in what is most likely, not under ideal conditions with everything being perfect.
Ask About Liquidity
Is there a stated term for the investment? Some investments have a lock-up period. Is there a liquidity mechanism in place that would allow you to receive a portion or all your money back prior to the end of that term? If you request a full or partial liquidation, would there be any fee, penalty, or other impairment for doing so? Is full redemption possible, or only partial redemption? Verify the holding period of the investment or that the liquidity provisions align with your needs and goals.
Anticipate Tax Complications
Consider consulting your tax professional about the potential tax consequences and complications that the specific investment may trigger. Will you feel comfortable potentially extending your personal tax return because you are waiting to receive the tax documents associated with this investment? Some investments issue K-1 tax documents and distribution of these forms is typically later than other types of tax documentation. Based on your specific tax situation and the anticipated return stream, are the expected after-tax returns worth your while? If the bulk of the anticipated return will be taxed as ordinary income, the net return may look much less appealing. The investment could make the preparation of your personal tax return more complicated, potentially increasing tax preparation costs. Your tax preparer can help estimate the potential increase in tax preparation costs. These additional costs are important to keep in mind as you consider the potential investment.
Understand the Risks
Typically, investors should expect to assume higher risk for higher expected returns. If the opportunity you are pondering is speculative, you may want to consider that you could lose a significant portion of your investment. Are you able to take a total loss on this investment and still successfully meet your financial objectives? Incorporate the potential for a loss into your financial plan projections and verify that the financial plan is still successful.
Conclusion
Investors cannot control their investment outcomes but can control their investment decisions. Sometimes investors don’t achieve the outcome they hoped for, but they can increase their odds of success by focusing on the fundamentals of investing and following a disciplined process. The above list is by no means comprehensive, though it can provide a solid foundation for the decision-making process.
Forvis Mazars Can Help
The sheer number of available investments can be overwhelming and working with a professional can help provide peace of mind that you are making good decisions for you and your family. The Private Client team at Forvis Mazars can help you build an investment portfolio based on your unique situation and goals. For more on what Forvis Mazars has to offer, connect with one of our professionals today.
Forvis Mazars Private Client services may include investment advisory services provided by Forvis Mazars Wealth Advisors, LLC, an SEC-registered investment adviser, and/or accounting, tax, and related solutions provided by Forvis Mazars, LLP. The information contained herein should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments. The services, or investment strategies mentioned herein, may not be available to, or suitable, for you. Consult a financial advisor or tax professional before implementing any investment, tax or other strategy mentioned herein. The information herein is believed to be accurate as of the time it is presented and it may become inaccurate or outdated with the passage of time. Past performance does not guarantee future performance. All investments may lose money.