Personal Capital Review 2017: Automatically Track Net Worth and Portfolio Asset Allocation


Personal Capital is free financial website and app that links all of your accounts to track your spending, investments, and net worth. You provide your login information, and they pull in the information for you automatically so you don’t have to type in your passwords every day on 7 different websites (similar to Mint). Investment-specific features include tracking portfolio performance, benchmarking, and asset allocation analysis.

Net worth. You can add your home value, mortgage, checking/savings accounts, CDs, credit cards, brokerage, 401(k), and even stock options to build your customized Net Worth chart. You can also add investments manually if you’d prefer. I have a habit of accumulating bank and credit union accounts, so I find account aggregation quite helpful.


Cash flow. The Cash Flow section tracks your income and expenses by pulling in data from your bank accounts and credit cards. This chart compares where you are this month against the same time last month. If you hate budgeting, you may find it easier to view a real-time snapshot of your spending behavior. Their expense categorization tool is not as advanced as, as you can’t for example tell them to always classify “Time Warner Cable” as “Utilities” and not “Online Services” or whatever they do by default. The default is usually pretty accurate, but if it isn’t you have to change it manually.


Portfolio. This is where Personal Capital is better than many competing services, by analyzing my overall asset allocation, holdings, and performance relative to benchmarks. They also analyze your investment fees to see if you can get them reduced. I first signed up for Personal Capital four years ago, and since then my investments have gotten spread out even further. I now have investments at Vanguard, Fidelity, Schwab, TransAmerica (401k), and Merrill Edge. It’s nice to be able to see everything together in one picture.



For comparison, Mint does not allow manual input of investments and it did not break down my asset allocation correctly based on my linked accounts. In fact, all it shows is a big orange pie chart with “99.9% Not Sure” and “0.00 Other”. Not exactly helpful.

Personal Capital considers the major asset classes to be US stocks, International stocks, US Bonds, International Bonds, and Cash. The “Alternatives” classification includes Real Estate, Gold, Energy, and Commodities.

If you have one bank account, one credit card, and a 401(k), you may not need this type of account aggregation service. Life tends to get messy though, and this helps me maintain a high-level “big picture” view of things.

Security. As with most similar services, Personal Capital claims bank-level, military-grade security like AES 256-bit encryption. The background account data retrieval is run by Envestnet/Yodlee, which partners with other major financial institutions like Bank of America, Vanguard, and Morgan Stanley. Before you can access your account on any new device, you’ll receive an automated phone call, email, or SMS asking to confirm your identity.

How is this free? How does Personal Capital make money? Notice the lack of ads. Personal Capital makes money via a optional paid financial advisory service, and they are using this as a way to introduce themselves. (People who sign up for portfolio trackers have money…) Their management fees are 0.89% annually for the first $1 million, which is rather expensive to my DIY sensibilities. They are a legit, SEC-registered RIA fiduciary and currently manage over $3.6 billion. In my opinion, this status improves their credibility as an entity with access to my sensitive information.

Note that if you give them your phone number, they will call you to offer a free financial consultation. If you answer the phone or e-mail them that you don’t want to be contacted anymore, they will honor that request. However, if you simply ignore the phone calls, they will keep calling. Know that you can keep using the portfolio software for free no matter what happens. Therefore, if you aren’t interested, I would recommend simply being upfront with them. A simple “no thank you” and you’re good.

Bottom line. It’s not what you make, it’s what you keep that counts. The free financial dashboard software by Personal Capital helps you track your net worth, cash flow, and investments. I recommend it for tracking stock and mutual fund investments spread across different accounts. I’d link your accounts on the desktop site, but interact daily through their Android/iPhone/iPad apps for optimal convenience (log in with Touch ID or mobile-only PIN).

Most Individual Stocks Don’t Outperform Cash?

A new academic paper was recently published with a confusing yet provocative title: Do Stocks Outperform Treasury Bills?. Of course they do… right? An excerpt from the abstract:

Most common stocks do not outperform Treasury Bills. Fifty eight percent of common stocks have holding period returns less than those on one-month Treasuries over their full lifetimes on CRSP. […]

But everyone knows stocks return more than cash. How does this work? Taken altogether, stocks outperform cash. But if you picked any individual company, your results can vary from total bankruptcy to extraordinary wealth. The paper found that if you pick an individual company and held it over its lifetime, it would be more likely than not to underperform a 4-week T-Bill (classified as a cash equivalent). You can use the T-Bill as an approximate tracker of inflation.

Wes Gray points out at Alpha Architect that this idea has been explored before. Here’s a chart of the distribution of total lifetime returns for individual U.S. stocks. The research is done by Blackstar Funds, via Mebane Faber at Ivy Portfolio.


The U-shaped distribution shows that there are a lot of big losers and a lot of big winners. Actually some are huge winners. In the end, a small minority of stocks have been responsible for virtually all the market’s gains.


Here we see that out of the 26,000 stocks studied, these 10 stocks below have accounted for 1/6th of all the wealth ever created in the US stock market.


I should reiterate that these are lifetime returns, from when they appeared in the CRSP database until now or whenever they liquidated. Unless you bought these stocks essentially at IPO (or 1926 when the database starts), you probably didn’t get these returns. If you go out and buy a well-established company today, your distribution of returns will likely look different. You’d be less likely to go bankrupt but also less likely to make a 20,000% return.

If you take a step back, as Larry Swedroe points out, this means it is technically quite easy to outperform an index fund. You simply either (1) avoid investing in a few big losers or (2) invest extra in a few big winners. That’s it! Gotta be easy to filter out a few duds, right? Yet, the lack of outperformance on average by professional managers continues, and the managers that outperform can’t be predicted ahead of time. So you can keep looking for the needles in the haystack, or you can buy the whole haystack.

Betterment Now Offers Human Advice + Flat Fee Structure

betterment_logoThe robo-advisor evolution continues. Betterment just announced some significant changes that include the option to upgrade to a Certified Financial Planner (CFP®) and a more simplified flat fee structure. Here are highlights from the new plans:

  • Betterment Digital. Their original product with digital portfolio management and guidance. Now at a flat 0.25% annually (no more tiers). No minimum balance. There is no longer be a $3/month fee if you don’t make monthly auto-deposits. The management fee on any assets over $2 million is waived.
  • Betterment Plus. Digital features above + an annual planning call from a “team of CFP® professionals and licensed financial experts who monitor accounts throughout the year.” You will also have unlimited e-mail access. The plan is a flat 0.40% annually. $100,000 minimum balance required.
  • Betterment Premium. Digital features above + unlimited phone access to a “team of CFP® professionals and licensed financial experts who monitor accounts throughout the year.” You will also have unlimited e-mail access. The plan is a flat 0.50% annually. $250,000 minimum balance required.

Betterment’s previous fee structure for Digital was 0.35% for balances under $10,000 with $100/mo auto-deposit (or a flat $3 a month without), 0.25% for balances of $10,000 to $100,000, and 0.15% for balances above $100,000. This means that with the new flat 0.25% fee structure, people with balances under $10k will end up paying less while those with $100k+ will be paying more. If I had a big balance at Betterment, I’d be quite unhappy with the price hike. Existing customers on the 0.15% tier will stay on that fee structure until June 1st, 2017.

Here’s how this breaks down in terms of your account size:

  • $10,000 account balance. Digital would cost just $25 a year ($2.08 a month). There is no longer any requirement for auto-deposit to avoid a $3 a month fee. Plus or Premium not available.
  • $50,000 account balance. Digital would cost $125 a year ($10.41 a month. There is no longer any requirement for auto-deposit to avoid a $3 a month fee. Plus or Premium not available.
  • $100,000 account balance. Digital would cost $250 a year ($20.83 a month). Plus would cost $400 a year ($33.33 a month) and include an annual planning call with a human advisor. Premium not available.
  • $250,000 account balance. Digital would cost $625 a year ($52.08 a month). Plus would cost $1,000 a year ($83.33 a month) and include an annual planning call with a human advisor. Premium would cost $1,250 a year ($104.17 a month) and include unlimited calls to a human advisor.

Commentary. I don’t write about robo-advisors all that often, but Betterment adding human advisors as an upgrade option signals a big change in the industry. For the investors with modest balances, the flat fee is cheaper but it has always been pretty cheap; at $50k in assets it costs the same as a Netflix subscription. Perhaps more important is knowing that as you continue to grow assets, a human advisor will become available without having to move your money elsewhere.

For those with at least $100k in assets, the upgrade cost to talk to a human advisor annually appears reasonable ($150 a year more at $100k asset level). You also get unlimited e-mail interaction for quick questions. If you go to an independent CFP and request a one-time consultation, that will usually cost a $400 to $500 flat fee. Potential concerns include that you don’t get a dedicated person but a team. However, in my experience even if you get assigned a dedicated person, they’ve often moved onto another job within a year. The wording also suggests that the pool of advisors are not all CFPs.

This move signifies both the good and bad about the current robo-advisor environment. The good is that they keep evolving and looking for ways to improve (i.e. index replication, tax-sensitive asset location, tax loss harvesting). The bad is that these can involve big changes with little notice (i.e. portfolio tweaks, fee changes). This time, the good is now you have the option to pay more for human advice. The bad is that if you already had a lot of money with Betterment, your fees got hiked by 10 basis points. This is why I prefer to DIY, because I enjoy being in control.

That said, if I had to switch I would prefer human access for estate-planning purposes (Mrs. MMB doesn’t want to manage our portfolio). Betterment says they have an advantage because they are independent. For comparison, I would look into Vanguard Personal Advisor Services (VPAS) which costs 0.30% annually and includes a team of human advisors. Possible drawbacks of VPAS include no automated tax-loss harvesting and you’ll be confined to Vanguard products.

Howark Marks Oaktree Memo: NFL Bettor’s Guide vs. Coin Flip

silver_eagleHoward Marks released another Oaktree memo earlier this month that somewhat coincides with this weekend’s Super Bowl. Inside, he revisited the New York Post NFL Bettor’s Guide, a panel of “experts” offering their opinion of winning picks for each NFL game during the season. The picks are relative to the point spread offered by the bookmakers. The experts further specify up to three “best bets” each week.

Here were the results after the 2015 NFL Season (from last year’s memo):


Here were the overall results after the 2016 NFL Season:

  • The best picker was right 55.1% of the time.
  • The worst picker was right 48.8% of the time.
  • On average the pickers were right 51.6% of the time.

In terms of the “best bets” only:

  • The best picker was right 62.7% of the time.
  • The worst picker was right 43.1% of the time.
  • On average the pickers were right 54.0% of the time.

Here’s my take on the observations in the memo:

All results cluster closely around 50/50. A blindfolded squirrel (or me flipping a coin) could easily blend in with this panel of “experts”. Some do a bit better than 50/50 (but not much better), while others do a bit worse (but not much worse). This is exactly what the distribution of a high number of coin tosses looks like. It’s very hard to consistently beat the point spread created by the “market” consisting of other bettors.

Don’t forget the vigorish. When you place a bet with a sports book, they charge a fee (“the vig”) for their services. For example, you may have to bet $110 to win $100. That translates to a roughly 5% commission on each bet. Even if you were right on average 54% of the time, you would still lose money in the long run after fees.

These are results from people who are paid to observe, analyze, and write about football games. Yet their performance could be mostly explained by luck, and even any slight outperformance on average is more than negated by fees.

In terms of investing, there are also many “experts” willing to offer their opinion on winning stock picks or other financial forecasts. Most will be average, or perhaps even slightly above average. However, history (and common sense math) shows that their performance won’t be good enough to offset the higher fees that they charge. In addition, there is no surefire way to find these above-average pickers ahead of time (using past performance doesn’t work). Due the presence of such fees, you can guarantee yourself “above average” net results by simply buying low-cost index funds.

I’m not one of those people that completely dismiss the possibility of skill in investing, but you if do want to go that route you should be realistic. If you’re picking your own stocks, keep an honest tab on your performance. If a mutual fund is charging 1.5% annually today to actively manage US stocks, it is rather unlikely that it will outperform a low-cost US stock index fund in the long term. On the other hand, an actively managed mutual fund that charges 0.15% annually and has various other positive factors has a more reasonable chance of slight outperformance. However, at the same time you must also accept the possibility of slight underperformance.

The Jack Bogle Appreciation Curve

commonsenseJack Bogle is rightfully respected and there are probably over a hundred mentions of his name on this site. His message of common sense, simple, low-cost investing continues to spread since he first opened the Vanguard 500 Index fund to the public in 1975. Yet, he still has to keep pounding his drum because there is so much other noise out there. Similar to the sketches of NYT journalist Carl Richards, I present to you what I call the Bogle Appreciation Curve.


The overall shape of this curve can probably be applied to any field where there are classic fundamentals and then a bunch of fancy stuff on top. It definitely applies to investing, where there is an insatiable desire for something newer, better, and more complex.

Beginner Investor. You’re just starting out, and you read some recommended business books. There’s the classic Bogle on Mutual Funds and the much shorter one called The Little Book of Common Sense Investing (which you picked) by Bogle that really made sense and sounded reasonable. You see why low-costs and passive investing are based on common sense and basic mathematics. You understand why you should avoid high-cost, high-turnover funds sold by brokers.

Investor Who “Knows Things”. You read more about investing, learning about correlations and factors and portfolio optimization. This stuff is pretty interesting! Historically, if I bought a nice slug of “small-cap value” stocks, a bit of commodities, a sprinkle of gold, I would have higher returns with less volatility? I’d do even better with a momentum-following strategy, and now there is a smart beta ETF that will do it for me? It seems so easy to do better than a “vanilla” portfolio.

Jack Bogle says “smart beta is dumb”. Hmm, maybe he’s just not with the modern times anymore.

Older, Humbled Investor. Well, that was exhausting. The historically optimal portfolio in 1990 wasn’t the same as the historically optimal portfolio in 2000, and that was again true in 2010 and will be again in 2020. I missed out on part of the 2008-2016 surge because people told me the market was overvalued due to CAPE and PE10 and many other metrics. If I had just stayed the course through it all, I’d have done pretty good. I think someone told me to keep it simple. Who was it? Oh yeah, Jack Bogle. I need to re-read his books.

You can also keep up with John C. Bogle’s media appearances on his personal website. The updates serve as a nice, regular dose of Bogle wisdom.

New Year’s Checklists: What Is Your Financial Priority List?


Updated for 2017. You’ve worked hard and you have some money to put away for your future self. What should you do with your money? There is no definitive list, but each person can create their own with common components. You may also want to revisit it again every year.

You can find some examples in this Vanguard blog and see what I had down in this 2006 blog post. Here’s my current list:

  1. Invest in your 401(k) or similar plan up until any match. Company matches typically offer you 50 cents to a dollar for each dollar that you contribute yourself, up to a certain amount. Add in the tax deferral benefits, and it adds up to a great deal. Estimated annual return: 25% to 100%. Even if you are unable to anything else in this list, try to do this one as it can also serve as an “emergency” emergency fund.
  2. Pay down your high-interest debt (credit cards, personal loans, car loans). If you pay down a loan at 12% interest, that’s the same as earning a 12% return on your money and higher than the average historical stock market return. Estimated annual return: 10-20%.
  3. Create an emergency fund with at least 3 months of expenses. It can be difficult, but I’ve tried to describe the high potential value of an emergency fund. For example, a bank overdraft or late payment penalty can be much higher than 10% of the original bill. Estimated return: Varies.
  4. Fund your Traditional or Roth IRA up to the maximum allowed. You can invest in stocks or bonds at any brokerage firm, and the tax advantages let you keep more of your money. Estimated annual return: 8%. Even if you think you are ineligible due to income limits, you can contribute to a non-deductible Traditional IRA and then roll it over to a Roth (aka Backdoor Roth IRA).
  5. Continue funding your 401(k) or similar to the maximum allowed. There are both Traditional and Roth 401(k) options now, although your investment options may be limited as long as you are with that employer. Estimated annual return: 8%.
  6. Save towards a house down payment. This is another harder one to quantify. Buying a house is partially a lifestyle choice, but if you don’t move too often and pay off that mortgage, you’ll have lower expenses afterward. Estimated return: Qualify of life + imputed rent.
  7. Fully fund a Health Savings Account. If you have an eligible health insurance plan, you can use an HSA effectively as a “Healthcare Roth IRA
    where your contributions can be invested in mutual funds and grow tax-deferred for decades with tax-free withdrawals when used towards eligible health expenses.
  8. Invest money in taxable accounts. Sure you’ll have to pay taxes, but if you invest efficiently then long-term capital gains rates aren’t too bad. Estimated annual return: 6%.
  9. Pay down any other lower-interest debt (2% car loans, educational loans, mortgage debt). There are some forms of lower-interest and/or tax-deductible debt that can be lower priority, but must still be addressed. Estimated annual return: 2-6%.
  10. Save for your children’s education. You should take care of your own retirement before paying off your children’s tuition. There are many ways to fund an education, but it’s harder to get your kids to fund your retirement. 529 plans are one option if you are lucky enough to have reached this step. Estimated return: Depends.

I wasn’t sure where to put this, but you should also make sure you have adequate insurance (health, disability, and term life insurance if you have dependents). The goal of most optional insurance is to cover catastrophic events, so ideally you’ll pay a small amount and hope to never make a claim.

What If You Invested $10,000 Every Year For the Last 10 Years? 2007-2016 Edition


Instead of just looking at one year of returns, here’s an annual exercise that helps you look at the bigger picture. You may know the 10-year historical return of the S&P 500, but most of us didn’t just invest a big lump sum of money in 2007, and most of us don’t just invest in the S&P 500.

Investment benchmark. There are many possible choices for an investment benchmark, but I chose the Vanguard Target Retirement 2045 Fund. This all-in-one fund is low-cost, highly-diversified, and available in many employer retirement plans as well open to anyone with an IRA. In the early accumulation phase, this fund is 90% stocks (both domestic and international) and 10% bonds (investment-grade domestic and international). I think it’s a solid default choice where you could easily do worse over the long run.

Investment amount. For the last decade, the maximum allowable contribution to a Traditional or Roth IRA has been roughly $5,000 per person. (It was $4k in 2007, but has been $5k or higher since.) That means a couple could put away at least $10,000 a year in tax-advantaged accounts. If you have a household income of $67,000, then $10,000 is right at the 15% savings rate mark.

A decade of real-world savings. To create a simple-yet-realistic scenario, what would have happened if you put $10,000 a year into the Vanguard Target Retirement 2045 Fund, every year, for the past 10 years. You’d have put in $100,000 over time, but in more manageable increments. With the handy tools at Morningstar and a quick Google spreadsheet, we get this:


In this case, I would say that ending up with a gain of over $50,000 for every $10k annual investment is nothing to sneeze at. If you put in $20k every year, your gains would have been over $100,000. Some of that money was invested right before the crash in 2008, and some has only been in the market for a few years. Not every year will have turned out to be a great year to invest, but taking it all together provides a more calm, balanced picture.

Investment Returns By Asset Class, 2016 Year-End Review


Although I am not always successful, I’ve been trying to pay less attention to the daily, weekly, even monthly movements of the markets. Once every few months, I will update my portfolio spreadsheet and make sure that I am investing new money towards my target asset allocation, but that’s about it. That said, I do enjoy a good year-end review. Here are the trailing 1-year returns for select asset classes as benchmarked by passive mutual funds and ETFs. Return data was taken from Morningstar after market close 12/30/16.



Commentary. If anything, I think 2016 reminded us that although many people are paid essentially to make predictions, most of them aren’t very good at it. Indeed, the more important skill is explaining why things actually turned out the way they did in hindsight. That way, you have a reason to believe their next prediction…

As 2016 ended, I was a bit surprised to see that every asset class listed above had positive returns. Accordingly, most people who owned a diversified portfolio in 2016 had decent returns. The Vanguard Target Retirement 2045 fund (90% diversified stocks and 10% bonds) was up about 8.9% in 2016. My personal portfolio (overall 70% stocks/30% bonds) was up about 7.8% in 2016.

As I get closer to having to live off of my portfolio, I am increasingly focused on the amount of dividends, interest, and rental distributions that my portfolio gives off. (This is in the low 2% range.) I know that total return is more important, but seeing the cash come in makes me more comfortable. I like the analogy to an investment property. If you get a reliable $2,000 in rent coming in every month like clockwork, you care less about the market value of the house itself.

ETF Tax-Loss Harvesting: 70% Overlap Rule of Thumb for Substantially Identical

calc_10keyTax-loss harvesting (TLH) is a common practice used to improve after-tax returns by realizing losses to either offset realized capital gains or to defer capital gains into the future. Many robo-advisors including Betterment and Wealthfront offer automated tax-loss harvesting as a feature. As nearly all of them hold ETFs, they accomplish this by selling the primary ETF for each asset class and replacing it temporarily with an alternative, secondary ETF. DIY investors can perform a similar maneuver as well.

The IRS wash sale rule states that you can’t deduct a loss by selling a security and immediately replacing it with something “substantially identical”. Instead, harvesters buy an ETF that is slightly different. It’s a grey area, as there is no solid definition of what “substantially identical” means. However, this recent Barron’s article (paywall, use Google News) offered up a rough rule of thumb that I hadn’t seen before (bolding mine):

Although the wash-sale rule remains ambiguous, there may be an alternative standard that investors can use for guidance. In the 1980s, the IRS created the “straddle rules” to address a loophole in hedged long-short portfolios. For tax-loss purposes, the portfolios on the long side couldn’t be “substantially similar” to those on the short, which the IRS defined as having over 70% overlap. “Some people use the straddle-rules definition as a surrogate to apply to the wash-sale rule,” says Eric Fox, a principal at Deloitte Tax. “If two ETFs don’t have more than 70% overlap and they’re not substantially similar, how could they ever be considered substantially identical?” That should give loss harvesters some confidence.

I was surprised by the conservativeness of this rule of thumb. Most of the TLH articles I have read by both human and software-based advisors implement more aggressive strategies than the 70% maximum overlap suggested above. A traditional advisor quoted in the Barron’s article admitted swapping between the Vanguard Total International Stock ETF (VXUS) and the Vanguard FTSE All-World ex-US ETF (VEU). VXUS and VEU have a 76% overlap by weight, according to this Overlap Tool:


Perhaps more importantly, these two ETFs have a near 100% performance correlation. Here’s a chart of the two ETFs over the last 12 months, per Morningstar (click to enlarge):


Meanwhile, this Wealthfront whitepaper shows their ETF tax-loss pairings and their correlations. Out of the 7 pairs, 4 have correlations of 97%+ and all of them are over 70%.


Commentary. There are few firm answers here. If robo-advisors marketing aggressive ETF tax-loss harvesting gather a lot of assets, I suspect the IRS will eventually provide additional guidance. I imagine the worst-case scenario as the IRS classifying past trades as violating the wash sale rule, nullifying your tax losses and possibly imposing additional penalties. I guess current practitioners don’t see a big risk of that happening. They essentially see a nearly free lunch by substituting these similar ETFs. Still, when you market something publicly as 99% correlated, aren’t you basically admitting that they are “substantially identical”?

Year-End Portfolio Rebalancing: Impact on Returns vs. Risk

scaleAs we close in on the end of the year, it is a good time to take stock of your investment portfolio. If you haven’t already, you should consider rebalancing your portfolio back towards your target asset allocation. Overall, this means selling your recent winners and buying more of your recent losers.

Now, you may think that rebalancing will improve your returns because you are “selling high” and “buying low”. However, the full picture is a bit more nuanced than that. If you think about it, the asset classes with the highest returns should eventually take over the portfolio if you never rebalance. If you started in 1965 with 50% stocks and 50% bonds and did nothing to 50 years, your portfolio in 2015 would have been overwhelmingly stocks. If you kept selling stocks and buying bonds, you would have probably lowered your returns in the long run. So why rebalance?


In his post How Portfolio Rebalancing Usually Reduces Long-Term Returns (But Is Good Risk Management Anyway), Michael Kitces provide a handy visual to summarize the effect of rebalancing into two scenarios:

  1. When rebalancing between asset classes with similar returns, the likely effect is to help increase your overall returns while not affecting your risk. An example is rebalancing between US and International stocks.
  2. When rebalancing between asset classes with different returns, the likely effect is to help lower your overall risk (improving your risk management in the chart) while decreasing your overall return. An example is rebalancing between stocks and bonds.

In the end, Kitces reminds us while your overall returns probably won’t be enhanced, the net effect of rebalancing is better risk management. I think of it similarly as preventing my portfolio from getting “out of control”. This is why people create “rebalancing bands” that let their portfolios wander a bit but not too much. For example, a 20% target allocation can vary from 15% to 25% before being rebalanced back towards the target number.

How To Become a Venture Capitalist for $100


How would you like to add “Venture Capitalist” to your social media profiles?

Indiegogo and Microventures have teamed up to offer equity stakes in startups to virtually anyone for as little as $100. Here is an Indiegogo blog post and a NY Times article covering the announcement. Previously, only accredited investors were allowed access in such markets, and that required an annual income of $200,000+ or a net worth of $1 million+.

This is different from Kickstarter crowdfunding where you put up monetary support and at most get an early product sample or some form of personal recognition. This is an actual investment with the opportunity to earn a significant return. (Or you might never see it again.)

I decided to look more closely at one of the available investments. Republic Restoratives is an urban, small batch distillery and craft cocktail bar in Washington, D.C. You can invest as little as $100, which will get you the perk of being “periodically invited to special parties, happy hours and previews”. If you invest at least $250, you’ll also get a founders signed bottle of CIVIC Vodka.

In terms of financial upside, you have to look closely at the investment terms:

Security Type: Secured Promissory Notes
Round Size: Min: $50,000; Max: $300,000
Interest Rate: Revenue sharing agreement which provides the investors 10% of the Company’s gross revenue, up to the repayment amount of 1.5x of their investment
Length of Term: Until the repayment amount of 1.5x investment is repaid
Conversion Provisions: None

In this case, you don’t actually get equity. You have a promissory note that says you have dibs on part of future gross revenue, but only up to 150% of your initial investment. For example, if they raise $100,000 and they manage to bring in $1,500,000 in gross revenue, they’ll pay out $150,000. If you invested $100, you’ll then get at most $150 back. Even if they take over the world and become the next Pappy Van Winkle brand, you’ll get the same amount back. Too bad, I’d rather be able to say that I am partial owner of a bar. 😉

A brief look at another investment option, BeatStars, shows that you have the possibility of owning preferred shares of the business if the note converts.

Bottom line. In financial terms, equity crowdfunding is very risky. The businesses available are unproven and have decided not to go the traditional VC route. To put it bluntly, you really shouldn’t expect to see your money again. In my opinion, the benefits are mostly psychological. You get to feel good about supporting a business you want to succeed. You may get personal recognition via your name on a wall or a signed bottle of vodka. I like the idea of telling people that I “provide venture capital to startups” instead of my real job.

Why Regular, Monthly Investments Are The Best Way To Build Wealth

automateHere’s another post on the topic of creating good habits

A common investing question is whether it is better to invest your money all at once (lump-sum) or gradually over time (dollar-cost averaging). The standard answer is that lump-sum is generally a better choice than dollar-cost averaging. This is mostly simple mathematics; If something goes up on average, then you’ll want your money in as early as possible.

However, in this Financial Planning magazine article Does investing monthly or annually beat a lump-sum portfolio? by Craig L. Israelsen, he argues that in the real world the best solution is regular, monthly investing. I recommend reading the original piece, but here is how I mentally broke down the concept:

  1. The most important thing to building wealth is saving a lot of money (savings rate).
  2. The best way to save a lot is to save often over time.
  3. The best way to save often is to develop a regular habit of it, so that it becomes effortless over the years.
  4. The hardest part about developing a habit is at the very beginning. You need an initial streak that is uninterrupted.
  5. The most likely thing to interrupt your streak is seeing a big drop when you look at your monthly account statements. That is scary. As humans, we like to focus on that number.
  6. With lump-sum contributions, you are much more likely to see a drop on a month-to-month basis. You have committed your money, and it is now subject to the market’s whims. You are also given a lot of time to think between actions, and you’ll have to muster up the motivation to make another lump-sum investment later.
  7. With regular, monthly contributions and a small portfolio size, you will hardly ever see an account balance drop.

Historical data from 1980-2015. Consider a diversified portfolio of stocks and bonds (details in the article). The following chart has three columns that compare overall market returns, an annual investment of $3,600 made each year on January 1st, and a monthly investment of $300 made at the start of each month.


In the beginning, your account balance “feels” like it is always growing, even though the market itself may be flat or even dropping. This is the benefit of regular, monthly contributions. The positive reinforcement will hopefully let an investing habit form. As your portfolio gets bigger, the difference between dollar-cost averaging and lump-sum investing becomes relatively insignificant.

Bottom line. Building the habit is the most important thing. If at all possible, you should make automatic, monthly investments. When your account is small, systematic investments make it more likely that the number on your monthly statement keeps rising every month. By the time that your portfolio starts to get big enough that it doesn’t help anymore, you’ll have already built the habit and be on the path to solid wealth. By the way, if you invest as soon as you have the money available (i.e. when you get your paycheck) then you already are getting your money in the market as soon as possible.