Private Investing?

[manlymatt83]

Bogleheads who do private investing, such as via the JOBS act or as an accredited investor: how do you allocate what % of your overall portfolio goes to your total market portfolio (think VT/BND) versus what % gets allocated to these kinds of investments?

Do you consider private investments to be the same as owning individual stocks -- part of your "play" fund? Do you consider them "alternatives"?

[Horton]

I personally follow Rekenthaler’s Rule: "If the bozos know about it, it doesn’t work anymore." I’m a bozo in the context of private investments and, therefore, do not have any.

[unclescrooge]

The private investments we have are in businesses where my wife is an active, but minority participant.

[manlymatt83]

The private investments we have are in businesses where my wife is an active, but minority participant.

And how do you factor that into your portfolio?

[unclescrooge]

The private investments we have are in businesses where my wife is an active, but minority participant.

And how do you factor that into your portfolio?

I don't. It's uncorrelated with any other asset class so there isn't any point.

[manlymatt83]

The private investments we have are in businesses where my wife is an active, but minority participant.

And how do you factor that into your portfolio?

I don't. It's uncorrelated with any other asset class so there isn't any point.

Would it be acceptable then to say “I don’t want private investments to ever be more than X% of my net worth”?

[unclescrooge]

The private investments we have are in businesses where my wife is an active, but minority participant.

And how do you factor that into your portfolio?

I don't. It's uncorrelated with any other asset class so there isn't any point.

Would it be acceptable then to say “I don’t want private investments to ever be more than X% of my net worth”?

I could, but it would be dependent on the risk of the investment.

If it was an entity where I did not have any control, then it would be no more than 25%, and likely much, much less.

For investments where I had some control, probably no more than 50% of investible assets.

[calmaniac]

What is the status of the privately held company?

Start-up? The company I work for is a private equity start-up. I get part of my compensation in equity. Given the probabilistic nature of the company's success and hence the stock valuation, I do not consider it in my net worth. [But hope to be able to some day.... ]

If, on the other hand, the privately-held company you were investing in had a dependable cash flow, you could more meaningfully value it. Plus, companies periodically get appraisals of their valuation.

Unless you have some insight or specific expertise in that area, I wouldn't recommend investing in tech private equity. For most people there are too many unknowables, such that you are effectively gambling. Maybe.....if you are investing in a car wash or similar cash cow.

[Ralph Furley]

I have ownership in several private companies. Managing three of them is my job. Ownership in these companies is required for me to have this job. They are cashflow businesses and that cashflow is my primary source of income. The other company I own an interest in is one that I have an active influence in (a seat on the board) and it is related to my other businesses. Someone else manages that business. I do consider these to be investments and I do not really account for these in my retirement planning, other than that I plan to eventually sell my interests in these companies and put the money into something much more passive and much more diversified. I would probably not be as interested in private investment if I were not actively involved in the running of these companies. Though, I will say that starting something from scratch with partners and watching it turn into a going concern is really fun and rewarding. Also, directly doing something that creates jobs is super cool.

Liquidating interests in private companies is not always easily done. So I could end up with an ongoing interest for awhile after I am no longer involved in the day to day, however my long term plan is to completely exit, eventually.

[investing engineer]

My opinion is that one shouldn't need any private equity as investment until becoming wealthy enough to diversify.

[desiderium]

Bogleheads who do private investing, such as via the JOBS act or as an accredited investor: how do you allocate what % of your overall portfolio goes to your total market portfolio (think VT/BND) versus what % gets allocated to these kinds of investments?

Do you consider private investments to be the same as owning individual stocks -- part of your "play" fund? Do you consider them "alternatives"?

I have private investments up to about 15% of my retirement savings. Several are small experiments I am slowly exiting, like fractional real estate ownership and lending club. Not failures, but I am not continuing to pursue these areas. I have some other private investments including a REIT. I consider these alternatives to stocks and bonds, and they have performed as expected in this regard. After the 2008 experience and doing well with the game overall, I can sleep most of the night with 45% equities.

[senex]

I hear Bob Brinker has gone downhill, but back in the day he advocated no more than 4% of assets in any individual company. I find it a useful rule of thumb.

I don't know a rule of thumb for private investments as an asset class. Some of the big endowments went up to 20% or so (?) and most had bad results. The story is different if you are actively managing the company (not a passive outsider).

Private investments are usually partnerships, which will complicate your taxes. You may get K-1s as late as October, with numbers and fields that require a tax professional to parse/understand. Also, for partnerships you'll need to file state tax returns in every state in which the businesses operate.

There's some evidence that after incurring this annoyance, returns match or lag the S&P 500. Food for thought.

[gjlynch17]

Bogleheads who do private investing, such as via the JOBS act or as an accredited investor: how do you allocate what % of your overall portfolio goes to your total market portfolio (think VT/BND) versus what % gets allocated to these kinds of investments?

Do you consider private investments to be the same as owning individual stocks -- part of your "play" fund? Do you consider them "alternatives"?

I have been investing in early-stage companies, both directly and through early-stage venture capital funds for over 20 years. I work in this area so I am comfortable with active management for this asset class. When I started, I had targeted 20% for this class. I am currently at 10% with the goal of reducing to 0% over the next decade. I do not intend to make any new investment commitments but have existing capital commitments for several venture funds.

Overall, this asset class has been a net positive for me, especially on an after-tax basis, although more than a few companies have gone under. There are tax advantages to this asset class, including (i) tax credits from some states, including WI where I live, (ii) 0% capital gains for Qualified Small Business Stock if held for more than five years and (iii) certain capital losses that can be used to offset taxable capital gains. I would not feel comfortable investing in other alternative private investments such as real estate or hedge funds as I have so special knowledge. Within the early-stage area, I would definitely recommend not getting too concentrated in any individual company as each company is highly risky. However, within a broader portfolio, this asset class has historically done well and has some diversification benefits.