Investing

Rich people are just making private equity deals themselves rather than bothering to go through private equity funds. Bloomberg reported: “Wealthy families are embracing their inner Warren Buffett, albeit on a smaller scale. They used to hand most of their assets to managers to invest. Now, following the likes of Buffett, Michael Dell and Bill Gates, many are acting like private equity firms, buying large stakes in companies or acquiring them outright. Families can exert tighter control over their money, give the kids something to do and cut their deal fees.” In investing, fee does matter. By directly buying a stake in a company, families can avoid paying fees to private equity firms, which typically charge a 2 percent annual management fee while keeping 20 percent of profits. “After a decade of direct investing we found that we actually saved millions, which were reinvested in companies and assets — huge, huge savings,” said Chad Hagan, whose family built its wealth in private health-care and financial businesses. (bloomberg.com)

After May 16 equity crowdfunding will no longer be reserved for the ultra-wealthy. Thanks to the new Securities and Exchange Commission passage, anyone can participate in equity crowdfunding instead of accredited investors with a net worth of more than $1 million or annual income of more than $200,000. However, equity crowdfunding could be dangerous for investors and entrepreneurs. Tanya Prive writes on Fortune: “Many people simply don’t understand how startup investing works. Venture investments are highly illiquid — when you make an investment in a startup, you don’t have the option to pull your cash out on demand. In fact, you typically make the investment and then wait anywhere between three to 10 years before there is a liquidity event, which can come in the form of a merger, acquisition, initial public offering or secondary market transaction. It’s important that new startup investors understand this asset class characteristic and are able to stick it out for the long-run.” With the mandated investment limit on equity crowdfunding, investors are left vulnerable to non-diversified portfolios. It’s best for individual investors to put their money in index mutual funds. (fortune.com)

Joseph Ciolli writes on Bloomberg: “When the going gets rough, the 1 percent start selling. That’s the finding of a new paper that says people with the highest income bailed from stocks disproportionately on the worst days of the financial crisis. The share of selling by the biggest earners rose ‘sharply’ in days following spikes in volatility, according to data on millions of sales reported to the government in 2008 and 2009.” Daniel Reck, a doctoral candidate in the economics department at the University of Michigan and one of the paper’s authors, said: “Very, very high income people are disproportionately likely to sell a bunch of stock during a financial crisis.” One explanation for the divergence is that rich people have more at stake per person and are more sensitive to shocks, though it’s only speculation, Reck said. Another is they believe they’re better market timers. A third possibility is that investors who earn less are reluctant to sell at a loss, a cognitive tendency known as the disposition effect. (bloomberg.com)

At Berkshire Hathaway Annual Meeting, Warren Buffett offered the biggest investment tip: Be wary of fees. Nobel Prize winner William Sharpe had elegantly explained the relentless rules of humble arithmetic to show that active investors in aggregate earn less than passive investors due to higher fees. For many years Buffett has been making the same argument and he urged investors to use low-cost funds to achieve their financial goals. The message is very simple: Investors would be better off ditching expensive money managers and consultants. “Supposedly sophisticated people, generally richer people, hire consultants. And no consultant in the world is going to tell you, ‘Just buy an S&P index fund and sit for the next 50 years,’” Buffett said. “You don’t get to be a consultant that way, and you certainly don’t get an annual fee that way.” We all can learn from Buffett’s biggest investment tip by watching out for fees and choosing low-cost index funds. (bloomberg.com)

Here is the best investment tip you will ever read: You are much better off by investing in a low-cost index fund than owning an active mutual fund or hedge fund. Kim Ishyan writes on TheStreet: “Every year, Standard and Poor’s publishes a scorecard showing how many fund managers beat various stock market indices around the world. And every year the fund managers lose. Last year’s scorecard showed that 84% of U.S. equity fund managers could not beat the market over the previous five years. Eighty-two percent could not do it over a 10-year period… It’s true some fund managers can beat the index from time to time (and these managers’ marketing departments let everybody know when they do). Some can even beat the index for a few years in a row. But there are almost none that can do it consistently. The managers that on occasion beat their benchmark index are probably just lucky.” Even the legendary investor Warren Buffett embraces this view on the money he’ll leave behind for his wife: “My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.” (thestreet.com)

An anonymous writes: “Global Impact, whose mission is to build partnerships and resources for the world’s most vulnerable people, announced the launch of Growfund—an online, community-based charitable giving platform. Growfund is a donor-advised fund that operates like a personal foundation or a 401(k) plan. Contributions can be saved or invested, grown over time and granted to the charities and causes that matter most to the donor. Unlike other donor-advised funds that require sizeable contributions before the funds are invested, Growfund contributions can be invested with the first dollar.” (charity.org)

If you have a high-deductible insurance, health saving account (HSA) is a great way to pay for medical expenses with triple-play tax benefits: Deposit tax free, grow tax deferred and withdraw tax free. Every year we have been contributed the maximum for family coverage into HSA. We then invest the money in broad-based index mutual funds offered in the plan. For those with limited investing options “you aren’t trapped,” said Kimberly Lankford at Kiplinger. You can still grow your health saving account. If you contribute outside of your employer’s HSA you might have to pay Social Security and Medicare tax on contributions. It’s best to continue contributing into HSA through payroll deduction to avoid the FICA taxes and to receive the matching fund if available. Then transfer the funds a few time during the year to an HSA with better investing options. (kiplinger.com)