Friday, May 15, 2009

Don't Make it Personal

I was once advised to treat my money as though it belongs to somebody else, as though I have a solemn fiduciary duty to protect and preserve it for my future self. Looking back, I think that is some of the best advice I ever got. Money flows in and out of our lives like water, and perhaps because of its intangible, liquid nature, it can be easy to adopt a casual, easy-come-easy-go attitude about it. But without a constant, vigilant effort to preserve money, again just like water, it tends to evaporate.

Don't invest for personal, emotional, or sentimental reasons. If you have some money, you may be approached by friends or relatives to invest in their business ventures. They will probably be very sincere and persuasive about the prospect. It might sound exciting, and you will naturally want to help facilitate their dreams, but this is the point at which you need to remember your duty to preserve money for your own future. I recommend that you think very carefully and do a lot of thorough research before even considering such a proposition.

First of all, partnerships often end badly. You might be best friends in the beginning, starting off with the best of intentions, but sooner or later, somebody will want out of the deal. When that happens, the remaining partners have to take up the slack, figure out a way to buy out the share of the exiting partner, etc. Even if your business venture succeeds, the stress of co-owning a business can really strain relations. Sometimes, if a friend borrows money he is later unable to repay, you might wind up losing the friendship, too, simply because he is too embarrassed or ashamed to face you again.

Secondly, the failure rate of new businesses is very high. If the proposed investment is a new venture, there is a good chance that your entrepreneur friend hasn't really done all of her homework and doesn't completely know what she's getting into. If it's an existing business with a good track record there may be better odds, but why do they need your money if they are already doing so well? In any case, sinking a significant portion of your money into one business is a violation of the basic principle of investment diversification, and puts you at unnecessary risk.

When I do embark on a private business venture, I prefer to go it alone, limiting my investment to an amount that I can completely afford to lose, and knowing that if things don't work out I will only have myself to blame. For the bulk of my money, I always remember that responsibility to preserve it first, and I stick with boring, safe, impersonal types of investments.

No comments: