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Where Does Crowdfunding Fit In?

As I have mentioned before, I, personally, am not the biggest fan of investing in the stock market.  I still have my retirement accounts mostly in stocks, but in the past, I also had some savings invested in the stock market while it was waiting for a better place to go.  I had no choice!  Because I am not an accredited investor and cannot invest in startups, as I would have liked, it was either the stock market or earn a measly return in CDs or money market accounts.

While I would have loved to invest in startups, and actually plan to once the Crowdfunding rules are passed (I will likely have to use a competitor’s platform though, as I cannot invest in the businesses we list on our platform at InCrowd), my Crowdfunding investments would not have made up my entire investment portfolio.  If you remember a previous post, How Much Can I Invest in Crowdfunding, all non-accredited investors will be have limits on how much we can invest in Crowdfunded businesses.

For me, my Crowdfunding limit would have been lower than the amount I had available to invest in total.  For example, if I had $10,000 I wanted to invest and was limited to $3,000 for Crowdfunding, I would have had to find somewhere else to invest the other $7,000.  That means I would likely have invested in both Crowdfunded businesses and the stock market.

So where does that mean Crowdfunding fits in?  One word you hear many times in the investment community is diversification.  You can diversify by asset type, like bonds vs. stocks, by geography, like U.S. vs. Asia, and/or by size, like small growth businesses vs. large established businesses.  You can also diversify by mixing and matching, like having stock in small growth businesses in Asia, or holding bonds of large established businesses in the U.S.

Investing in Crowdfunded companies serves as a way to diversify your portfolio by adding stock in small, growth businesses in the U.S.  You can also use regional geographies within the U.S. to further diversify, but generally speaking, this is where Crowdfunding would fit into your portfolio.

The decision you will have to make on your own is how much of your portfolio you want to put in Crowdfunding investments.  Back to a $10,000 portfolio for an example, if you decided you wanted to invest 70% of your portfolio in stocks, 20% in bonds and 10% in Crowdfunding (which is technically stock, but for this example, we will break it out to its own category), then you would have $1,000 to invest in Crowdfunded companies.  Even if your legal limit is $3,000, if you only wanted 10% of your portfolio in Crowdfunding, only invest $1,000.  You could invest $100 in ten companies, $200 in five – whatever you wanted.

Some people, like me, think investing in Crowdfunding businesses is fun and would not necessarily want to think of how it ties into an overall investment strategy.  Even if that were the case, I would still have a limit, and it is very important that you know your limit before you invest, too.  Set your limit based on how much you are willing to risk, keeping in mind that you could lose your money.

In summary, if you do want to think of Crowdfunding as a piece of your investment portfolio or part of an investment strategy, you can consider it another option you can employ to help diversify your portfolio.  Crowdfunding would fit into your portfolio as a stock in a small, growth company based in the U.S., and should be complemented with other investments in large, stable companies in the traditional markets.  If you do not want to think of it in terms of an overall investment strategy, then Crowdfunding should fit in as a new, fun way to invest and help startups in your community – but it should still be done responsibly.


One comment on “Where Does Crowdfunding Fit In?

  1. socialtalentpool
    October 14, 2012

    Reblogged this on Socialtalentpool.

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This entry was posted on October 12, 2012 by in Crowdfunding 201 and tagged , , , , , .
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