The 6 Biggest Mistakes Investors Make
I got six of the biggest mistakes investors make. The whole point of showing this to you is to basically prevent you from losing a whole bunch of money. So here are examples, examples of investments I see people make where they've been wiped out: limited partnerships, hedge funds, start-up investments, real estate partnerships. Even though I like real estate, I am personally not a big fan of real estate limited partnerships. What I have learned growing up in the investment business is this: a lot of stuff gets packaged up and sold to retail investors. By the time it is sold to you and I as a retail investor, it is garbage, because the commissions and the fees. Everybody's making money but the retail investor. So how do you prevent yourself from losing money in these investments? And here's how you prevent it. The question you always ask yourself, who's ever selling you that investment is, "Is the investment liquid?" "Can I sell that investment?" And, like everything I showed you today.
The robo advisors for example. You build a portfolio diversified in mutual funds, ETFs, stocks, bonds, all that stuff, the longest it's going to take you to get your money back, five days. You can put in a sale, they're gonna sell the trade, and they're gonna get you a check and you're gonna have your money back in five days. You buy a home, you're not getting your money out in five days, but it's liquid unless you buy in a really bad market and you price your home really wrong, you are at least getting your money back in a year. Most cases you're selling your home and your getting out of your real estate within 120 days. So that's liquid. Most package products are not liquid, unless you are worth in excess of 10 million dollars, you should never be considering hedge funds. Limited partnerships, I would avoid these like the plague, in most cases. Start-up investments, so I talked about how I've invested in start-up companies, but I want to be super... There's all this stuff going, there's all this online marketing, and I even know some of these people who do this online marketing. Some of these people I really love and really respected, and one of these people right now is talking about, I gotta be careful because I don't wanna get anyone in trouble here, but a lot of promotion around this idea that there's a secret way into these start-up companies. You're gonna invest in the next Facebook. You're gonna invest in the next AirBnB. You're gonna invest in the next CreativeLive. And you wanna know the truth? The changes are that you're not. If you're not a professional investor with a whole lotta money, these private equity firms, and these VC firms, they go out and they invest in 50 companies, or 75 companies, or 100 companies. They know they're gonna lose money on most of their investments. You as an individual investor, you need to be buy-, you're not gonna buy one or two companies, you need to buy 10, 15, 20 of these companies, and the problem is today it is easy to invest in start-up companies, and there's all kinds of crowdsourcing websites. I could give you 20 crowdsourcing websites right now where you can invest in the next hot start-up. Here's what I can tell ya, for most of those investments, it ends really badly. So, the amount of money that you should put, if you're gonna have money in these kind of risky investments, no more than 5% of your net worth to 10% total. So if you have a half a million dollars, and you wanna be playing this game, then you say "okay, I'm gonna take 50 grand, and I'm gonna divide that up amongst investments," that's five thousand dollars an investment. That make sense? So mistake number two: investing more than five to 10% of your money in one asset or money manager. So, I don't, I see people put all their money with one money manager. They pick out one mutual fund. Let me go back to that Vanguard Star Fund because I told you I love that one fund. I talked about target dating mutual funds. There's 11 funds in that one fund, so it might be one investment, but there's 11 separate asset classes. You might be able to buy one mutual fund, and have 15 thousand separate investments inside that one fund. Don't put all your eggs in one basket. Mistake number three: investing on margin. Anybody here know what margin is? So margin is, you've got a brokerage account and you can borrow against it and keep investing. So you could have 100 thousand dollars in a brokerage account, and the brokerage firm will loan you another 100 thousand dollars. And so, and they'll launch you, it depends on how much money you have, and what kind of a client you are, but they're charge you 8%, as low as one and a half percent depending on the brokerage firm. Some of these brokerage firms even market to this. They'll say, you know, you can borrow one and a half percent, and you can go and buy dividend producing stock at two and a half percent, and then you can make the spread, you can make one percent. Great, unless the stock goes down, unless the market cracks. Happens to be, you know, we're at an all-time high in the stock market, and no surprise, there's more money on margin right now than there's ever been in my lifetime. It starts to tell you that the market is maybe getting a little bit frothy. So don't ever invest on margin. My family at the Bach Group, I mean, we had, I left we had over 700 million in our management. My sister manages it today over a billion dollars. We had no clients on margin. I mean, just, and don't ever let an advisor convince you to do that. Number four: loaning money to people that a bank won't loan money to. So by the time someone comes to you to borrow money, everybody else said "no." Right? So if someone's got a business and they're like, "hey, I'm doing a convertible note." People do, I've invested in convertible notes, but I'm investing it with my percentage and I know what I'm doing. By the time, the average person, someone comes to you and says, "hey, I wanna borrow a hundred thousand dollars, I'll give you 10%," you're like "10%, I mean, my God, David showed me the numbers, if I can get 10%, that's great, it's guaranteed," until they stop paying you, and then they don't pay you back. Don't loan money to someone that a bank won't loan money to. You're not in the banking business. It always ends badly. How many of you know someone who loaned money and then didn't get it back? (chuckles) Anybody know anybody personally? Yeah, mistake number five: signing a personal guarantee on business debt or leases. So this one's tricky, right? Because when you go to borrow money, and you have a business, and most cases, especially if it's a smaller business, they're gonna make you do a personal guarantee. You need to really think through what you just signed up for, and that's everything, that's the lease, like you go lease office space, you go lease furniture, all of that if you signed a personal guarantee. First of all, if you can avoid signing a personal guarantee, never sign a personal guarantee. And the most important thing when you sign up for anything that is a personal guarantee, don't look at the month, look at the lifetime of the loan. So I see businesses, I see people start businesses. A friend of mine just recently was gonna start a business, and so she took the space for the business, even though I, first I said to her look, you gotta run all the numbers, let me see the spreadsheets, show me your expected cash flow. She came back and told me what the rent was gonna be. I'm like it's just not gonna, I just know the math's not gonna work. You're about to take on rent that is so high, you won't be able to possibly make money on this business. It could take you years, and she's like "no, no, no, it'll definitely work, I'm really confident, I know this great location." So she does the lease, and I'm like "Jude the moment you sign this lease, you've just personally guaranteed, you've just personally put yourself on the hook for 750 thousand dollars. So 750 thousand dollar liability. She said, "well, what do you mean?" I'm like, "you're signing a 10 year lease, that's a 750 thousand dollar liability." So she gets typical deal, free months, I think they give her six months of free rent, starts having problems with the business, ultimately had to walk away from that lease and get somebody else to take the lease over. She was lucky that she could because she was on the hook for 750 thousand dollars in lease payments. So be very careful. Mistake number six, not signing your own checks. I don't care how successful your business is, I don't care how busy you are, always sign your own checks. It's like, it's like the one rule that never goes away. Somebody else can cut the check. My business, my bookkeeper cuts the checks, puts 'em in front of me, I go through 'em, I check it off, the invoice is attached to the check, then I sign the checks. Now the truth is I do most of my banking online at this point, so I'm signing less checks, but every time somebody gets ripped off, it is because they let somebody else sign their checks. And every time you hear about celebrities that have been scammed, it is because they hire a money manager, or financial management team, and those guys sign their checks. I think it was, who'd I just read about?
[Female Assistant] (mumbles)
Alanis Morissette, Alanis Morissette?
Right, she was on the cover of Yahoo last week that she's suing for 4.9 million dollars or something? Right, you saw that? How do you say her name again?
Alanis Morissette, yeah. I mean, the stories happen all the time, and sure enough she's not signing her own checks. Okay, so, those were the six biggest mistakes people make, don't go make 'em.