While the scale might be different, I see this error in every family that I get to know.
We err by making an investment to help someone “do something.”
Some examples from my own investment history:
- I’m self-employed and have often been tempted to buy myself an office so I can have a place to do something
- I’ve offered to back friends in start-ups so they can have the funds to create a business and do something
- I backed myself in a low-return business, where I didn’t understand the market, so I could have something to do
- I guaranteed the debt of a friend’s business so he could borrow additional money for his start-up
- I purchased a property so a friend could have a job acting as my property manager
To limit the damage, I have two questions that I ask.
First: What is the purpose of my family balance sheet?
- Maintain independence and dignity of elders
- Educate the kids
- Share experiences with each other
- Produce a growing stream of cash flow to fund my future living expenses
- Support a feeling of security and freedom of occupation
You might have a different list. I’d encourage you to write your list down because the checklist might help prevent expensive errors.
Second: How well have I done with predicting my life on a ten-year prospective basis?
While my life has been rewarding, it’s path has been unpredictable on a ten-year rolling basis.
The unpredictability of life means there is value in maintaining a straight-forward balance sheet that isn’t concentrated in any individual, geography or company.
Put plainly, I’m nearly certain to continue to get the future wrong – especially when I try to predict my family’s needs, desires, location…
Let’s say an investment can get past those two questions.
It is time to keep it real.
#1 – Are we backing the best members of our team?
The best people don’t need the help of connected parties.
There is plenty of money available for good people with good ideas.
Therefore, by definition, most family investments are focused on the weakest members of the team.
Don’t do it.
#2 – Can we afford to lose our maximum exposure immediately?
If you can’t afford to lose your full exposure, immediately, then don’t do it.
If you’re struggling to say “no” then
- say “yes” to spending time to help raise funding from a third party
- lease instead of buy
- focus on enjoying each other’s company, rather than investing together
- make an introduction to an expert in the industry to facilitate a working apprenticeship
- pay for expert instruction
These options have had a great rate of return in my life.