Managing crowdfunding investment portfolio risk
Over the next few weeks I will be offering advice and information regarding Crowd Funding and how to participate in it.
Crowd Funding is an exciting alternative so long as it is managed and that the basis on which you participate is correctly structured. Herewith the first set of thoughts on the subject:
1. Limit Your Exposure
Limiting your exposure is key to being a successful crowd funding investor. There are two ways in which one becomes exposed when one participates in investing activities.
· Over Extending yourself
It is easy to become over exposed when investing by investing too much in a particular asset or class of assets.
If you are interested in investing in crowdfunding opportunities, restrict your total crowd funding investments to 5% or less of your overall investment portfolio, particularly if your net worth is lower than $1 million or you have an annual income lower than $100,000.00.
If you have more money to spare you could increase the limit of your investments, perhaps up to 10%.
Only invest money that you are 100% completely willing to lose. “Investment money needs to be extra money; it can’t be money that you need to live on next year. It’s got to be money you have the ability to lose and whose loss won’t disrupt your life.”
· Investment Portfolio Exposure
Investment portfolio exposure is the level of exposure each individual asset subjects your portfolio to. For crowd funding investments we recommend that your investment portfolio investment exposure per asset/company never exceeds more than 8%. The value of your investment portfolio can be demonstrated by the following equation
o Total Investment Portfolio Value (TIPV) = Uninvested Funds/Free Funds (UF) + Invested Funds (IF)
Where Invested Funds (IF) = Sum (IFa + IFb+ ----+ IFn) and IFn<8% of IPV
As an example, if you had set aside $1000.00 to invest in crowd funding investment opportunities you should invest no more than $80.00 in any single opportunity. If you only find two opportunities that meet your investment criteria then you should not invest a total of more than $160.00 with a maximum of $80.00 going to each opportunity.
You need to be cognizant that your uninvested funds are also included in the total value of your investment portfolio and that just because you have earmarked them for crowd funding investment does not mean you must invest them immediately, one of the hallmarks of a successful investor is the patience to wait for the right investment opportunity, this attribute is even more important as you participate in crowd fund investing, if you would like your money to earn while you wait for the right investment opportunity you can always find other ways for it to EARN
Ideally one should build a diverse crowd funding investment portfolio keeping in mind the 80/20 rule i.e. 80% of the income from your portfolio will come from 20% of the assets in that same portfolio. In addition to building a diverse portfolio one should ensure that the value of their individual investments is evenly distributed across the assets in their portfolio.
The temptation to exceed the 8% limit is going to be really great. You will come across some opportunities that look good, but don’t be tempted to invest outside of these guidelines until you have significant experience in crowd funding investment. You can however increase the money you have available to invest within 8% limit by increasing the number of income streams you have at your disposal.
A great way to achieve this and at the same time increase the amount of money that you can invest within the 5% & 8% limits is a practice that I call financial income stream compartmentalization .
· This is a risk management strategy that I personally use to invest on the Zimbabwe Stock Exchange. It involves setting up an income generating project specifically to generate income to fund the acquisition of an asset/assets or any other expenditure that is abnormal to your usual budget.
How it works. When I decided to start investing on the Zimbabwe Stock Exchange I simply set up another income stream to fund those investment activities.
The way I did that was by taking between 5% to 10% of my normal income and setting up a simple business project. In my case it was a network marketing business in the health and wellness industry. I chose this because I realized that I could engage in it without disrupting the activities that provided my normal income stream.
I took the profits form that side project and used them to invest in on the Zimbabwe Stock Exchange and I now do it with opportunities provided by small businesses as well .
If you consistently invest 5%-10% of your normal income into a side project you will find that the income from your side project will grow and you will be able to dedicate larger amounts to your crowd funding investment activity.