In the next few weeks, we will be going over some of the more popular investment options for Self-Directed IRAs and Solo 401(k)s. Today, our focus is on private businesses:
First private, and then public. That’s the dream, right? Your old college roommate is starting a killer new app that’s going to revolutionize the way humanity interacts with the internet and turn the digital revolution on its head. Get in now, and in a few years your stock options will be so overwhelmingly huge, the dollar amount will actually exceed the known number of particles in the universe. Okay. Could happen. Just remember, though, that retirement investing has consequences. Namely, you could be out for retirement. These are your savings we’re talking about. And that brings us to an important point. Sometimes there is a temptation to roll the dice and bet the house with retirement funds.
Why? Because they seem to be free money just sitting around. That little voice that sounds something like a toned down Jim Cramer starts whispering behind the rational part of your mind: “Go for it. That’s the whole point of your IRA. To invest for retirement and make a gazillion dollars. You’re going to kick yourself if you don’t do this. Your roommate’s really smart. You’re just so-so. You’re funds are earning what? Like .00001%? What’s to lose? That guy is definitely going to take over the world. Better get with the program. Put all of your money in as soon as you possibly can.” There are plenty of popular economic/psychological/heuristic/pinkfloydian theories as to why people feel this way about their money, but one thing is certain. When you take a step back, you can easily recognize the fallacies in the argument. Here are the big two:
- Nothing is certain. – There are plenty of smart cookies out there who have failed in very intelligent ways. Some of the most spectacular crashes have come from some of our savviest business minds.
- Never put all your eggs in one basket. – This is the basic rule number one for any kind of investing. Sometimes certain things work and sometimes they don’t. Diversification helps temper the field. You’ll usually always be making at least some profit, and it’s highly unlikely that a diversified portfolio will ever get totally wiped out.
Now this is not to say that you shouldn’t invest in your friend’s company. It might actually be a great idea. Just do it the smart way. Use some of your retirement funds for that investment and use the rest for other assets. Even if he does go on to strike it big and rule the entire universe, half of that will still do you nicely.