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Managing money for family member


Aurelius
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I have a close family member who’s got some money saved up.

He is uncomfortable investing it - keeps it in cash. Pays a negative interest on it now.

He’ll basically never get around to invest it. 

He doesn’t need the money now.

Might need it in 3-5 years time. (As in might want to spend it/portion of it)

 

I was playing with the idea of making him an offer:

-I’ll invest it for you.

-If the portfolio loses money I will pay the loss 100%.

-Provided you stay invested for lets say 4 years (fair?)

-He would obviously be able to exit anytime he want.

 

Why even do this?

-I want him to make some money vs paying negative interest to the bank plus inflation devaluing his money.

-I feel confident he’ll make money over lets say 4-5 years.

-If not I’ll be able to take the losses easily. (Seems low risk)

 

 

What’s a fair compensation/structure?

Pros/cons?

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1 hour ago, Aurelius said:

I have a close family member who’s got some money saved up.

He is uncomfortable investing it - keeps it in cash. Pays a negative interest on it now.

He’ll basically never get around to invest it. 

He doesn’t need the money now.

Might need it in 3-5 years time. (As in might want to spend it/portion of it)

 

I was playing with the idea of making him an offer:

-I’ll invest it for you.

-If the portfolio loses money I will pay the loss 100%.

-Provided you stay invested for lets say 4 years (fair?)

-He would obviously be able to exit anytime he want.

 

Why even do this?

-I want him to make some money vs paying negative interest to the bank plus inflation devaluing his money.

-I feel confident he’ll make money over lets say 4-5 years.

-If not I’ll be able to take the losses easily. (Seems low risk)

 

 

What’s a fair compensation/structure?

Pros/cons?

 

no matter how unlikely the risk, making an uncompensated guarantee like this is a disservice to you and anyone who depends on you (your family). the guarantee, even if compensated, is a terrible idea that will 95% be okay, but 5% chance of ruining either your finances or your relationship with this person. 

 

 

 

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Did the same with a few family members mainly to get them started and over many of the typically “stock market” fears. 
 

On what’s fair, IDK depends on the objective. Are you trying to make money for yourself? With the above structure? If so I’d just guarantee 5% and then go 50/50 on profit over that. If not then just do it for free. Or a case of beer every now and then 
 

 

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before someone counters with "but buffett did it" (which he did), I'll go so far as to say I wouldn't trust anyone who offered this arrangement to me because it would reflect poorly on his/her judgement and indicate overconfidence.

 

@Gregmalis more confident and embraces the tail risk much more so than i do and is richer for it, but I'd just reiterate that personally guaranteeing losses on someone else's capital particularly if that capital is potentially flighty / short duration is a terrible, terrible idea. 

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Agree with the pupil  - it doesn't pass the smell test. Wrecks of overconfidence and dare I add arrogance. I wouldn't bite on this sales pitch  but I Aurelius could hedge/buy puts to protect his downside so its not his personal money he is paying if its not profitable with 4 years. 

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19 minutes ago, thepupil said:

before someone counters with "but buffett did it" (which he did), I'll go so far as to say I wouldn't trust anyone who offered this arrangement to me because it would reflect poorly on his/her judgement and indicate overconfidence.

 

@Gregmalis more confident and embraces the tail risk much more so than i do and is richer for it, but I'd just reiterate that personally guaranteeing losses on someone else's capital particularly if that capital is potentially flighty / short duration is a terrible, terrible idea. 

Yea Im deducing from the way he put the question that he s talking like $100k or less, and for family at that. So its not like entering a real business proposition where thats the model. And its not like its a life changing(I guess debatable depending upon the audience) amount of money. 

 

I would never suggest doing this with the intention of making a profit or a living out of it, with the ingredients involved above. Mainly, as Ive said Ive done for friends and family, is to get them off and running. Typically, with larger amounts or meaningful money, I just tell people its easy and they can do it them selves and then just give them ultra conservative investments and tell them to buy it in their personal accounts. I agree managing it is probably fruitless in close proximity situations where theres more to lose than just money. 

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Look at it a different way - what is it that you are really trying to do for this person?

'Cause it would seem that it's really about the relationship this person has with what money is. ie: it's simply a tool.

 

Offer to split an ongoing charitable donation with him/her, conditional on it being something that you both actively participate in.

You will both be 'equals', there will be no 'perception' issues, you will do good things, and over time you can assume a growing portion of his/her contribution.

If something more comes out of it, great.

 

Guarantees are a really bad idea, and put both you and your family at significant risk.

Different strokes.

 

SD

 

 

 

Edited by SharperDingaan
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A friend did something similar with his brother-in-law - worked out well (circa 2012 so everyone did well). If the guarantee isnt a life-changing sum, the idea seems genuinely kind on your behalf. On the other hand, you could offer him the chance to mirror your trades/portfolio where the onus and hence the risk remains on him but you guide him through the process.

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So to be clear:

The objective is as Gregmal mentioned: to get them started and help with the “stock market fears”.

And of course to make money as opposed to paying negative interest rates and inflation doing its thing.

 

It’s not to start a business or any such thing.

 

Also with regards to risk:

The amount invested would be somewhere in the region of 1-2% of my current portfolio.

 

Having said that I am not looking to offer a freeroll here. I would personally never accept such a deal and don’t intend to offer it. So I understand the resistance in this regard.

 

The point is to offer a proposal that is fair to both parties. (if it ever happens…)

 

Obviously the willingness to accept risk will be different for different individuals.

 

On my part I don’t think I am risking much:

-I will only lose money if the portfolio is down after lets say 4-5 years. Seems unlikely.

-if it’s down 50% I’ll lose 0,5-1% of my current portfolio. I wont like it, but I can deal with that.

Upside: perhaps a nice watch or vacation!

 

Gregmal mentioned: 5% guareentee + 50/50 on profit over that.

Another example is 25% of profit…?

 

Obviously the offer would be contingent on him staying the course over lets 4-5 years.

 

For the people who still feel this a bad deal for me: What would be a fair deal in your opinion?

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The fair deal is to 'walk away'

The horse has already been led to water. If it doesn't want to drink, it's not to you to make it - It's not your decision.

Hard to accept, but the better for all.

 

To many people, monetary wealth is simply having the money to comfortably be able to pay for what you need, through until you eventually croak.

If you already have more than enough, making the pile bigger via compound growth or minimizing inflation, just isn't relevant. You already have more than you can spend, getting even more is essentially worthless. Wealth is just being measured on other, and more relevant, metrics.

 

To beneficiaries, that 'old bastard' should be making every nickel he can! so as to maximize my inheritance!!

I have a mortgage to pay off, expensive cars to buy, a lifestyle to maintain - and it ain't cheap!

Hungry mouths.

 

Hence either 'walk away',

or come at it a different way.

 

SD

 

 

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Just my two, very zinc filled cents…

 

IMO if you are guaranteeing his money against loss for 5 years, you’ve really got to be willing to go longer or risk the relationship. I was actually in a similar situation back in March when BRK was dirt cheap. I had a friend who was “lost” risk adverse and sitting on some money. Buffett has said in terms of the banking industry (just read that deposition” that folks will never be as careful with others money’s s they are their own…I find personally I am the opposite. Imagine if you put the money in investments that performed superbly, then after 5 years we have another 2008 and everything drops 50% and there they are left with half their original investment, after you have taken your cut…how will that look? Will they have the wherewithal to weather the storm, will they look at you differently? I only made suggestions for BRK because I knew it was a slam dunk and had a majority of my own personal port in it, and was adding aggressively. I don’t know that there are similar opportunities available now that I would feel comfortable investing family/friends money into, although that could change in the next quarter or two. 

 

My gut is to agree with Sharper and put it in the too hard pile..maybe some generic placed to park the cash that will at least keep up with inflation but as for guaranteeing reruns and taking a cut, I personally would do it pro-bono and error on the side of caution. If I didn’t take a cut it would be easier to explain that nobody can time the market and things happen if is money suffered a setback later and I had not dipped my hand in the cookie jar. 

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Go for it, just don't charge anything. That way, it's a no-lose proposition for both of you:

 

If he makes money, you helped him out.

If he doesn't, you make him whole, and it was a fine gesture at minimal cost.

 

This is a good idea, as long as you don't take a cut. 

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1 hour ago, Libs said:

Go for it, just don't charge anything. That way, it's a no-lose proposition for both of you:

 

If he makes money, you helped him out.

If he doesn't, you make him whole, and it was a fine gesture at minimal cost.

 

This is a good idea, as long as you don't take a cut. 

How do you know it costs you little? It depends what happens in the markets and how the portfolio is performing as well as the size. Why would @Aurelius take a risk with at no benefit to him?

 

If it were in the US and just little money, I would just tell them to go to treasurydirect and buy the isavings bonds and be done with it.

Edited by Spekulatius
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1 hour ago, Spekulatius said:

How do you know it costs you little? It depends what happens in the markets and how the portfolio is performing as well as the size. Why would @Aurelius take a risk with at no benefit to him?

 

If it were in the US and just little money, I would just tell them to go to treasurydirect and buy the isavings bonds and be done with it.

 

+1

 

 

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3 hours ago, Spekulatius said:

How do you know it costs you little? It depends what happens in the markets and how the portfolio is performing as well as the size. Why would @Aurelius take a risk with at no benefit to him?

 

If it were in the US and just little money, I would just tell them to go to treasurydirect and buy the isavings bonds and be done with it.

OP wrote:

<The amount invested would be somewhere in the region of 1-2% of my current portfolio>

 

So yeah, it won't cost much.

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@John Hjorth

But where have you been? 🙂

{Why do i get the feeling that some of those who are not heard may be the ones to listen to?}

{Related to this thread, three of my off-springs are reaching autonomous adulthood and have started to ask questions, both backward and forward looking, about their investment portfolios, questions which they are not naturally endowed to integrate (capacity and temperament) and some questions which I was not ready for despite a tendency to try to plan for any scenario; perhaps I need to throw some questions out in the open? Or get outside and independent counsel?}

-----

FWIW, in this environment, it seems that combining fortunes with family members may require some kind of long-term commitment (10-20 years?) and a no-questions-asked and sealed-trust component?

What does long-term mean anyways?

 

 

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FWIW, in this environment, it seems that combining fortunes with family members may require some kind of long-term commitment (10-20 years?) and a no-questions-asked and sealed-trust component?

 

+1

 

Think across generations, think training well beyond just 'investing', and the female side governing their own arrangements.

If you didn't know already, you will quickly find out where the brains really are!  

 

SD

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I've done this for several relatives. For the 94 year old mother in law, who's financial person

had her in 90% equities, I dropped her to 50\25\25. There is enough liquidity to last and she and her family know that losses can occur but not as severe as before. I chose not to manage her account

because I do not like back seat drivers who don' know how to drive (I only have a learner's permit.)

For the younger nieces and nephews, I've made sure they had emergency funds, Roths and some type of 401k\ira set up.  Vehicle of investment choice is VGSTX which offers broad diversification across asset classes at low cost. They are told to go to Vanguard and read about the fund. Also told to educate themselves before investing in individual securities. I also step out but tell them I'm happy to be consulted. Don't want to risk the relationships.

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On 1/23/2022 at 11:38 AM, Ulti said:

I've done this for several relatives. For the 94 year old mother in law, who's financial person

had her in 90% equities, I dropped her to 50\25\25. There is enough liquidity to last and she and her family know that losses can occur but not as severe as before. I chose not to manage her account

because I do not like back seat drivers who don' know how to drive (I only have a learner's permit.)

For the younger nieces and nephews, I've made sure they had emergency funds, Roths and some type of 401k\ira set up.  Vehicle of investment choice is VGSTX which offers broad diversification across asset classes at low cost. They are told to go to Vanguard and read about the fund. Also told to educate themselves before investing in individual securities. I also step out but tell them I'm happy to be consulted. Don't want to risk the relationships.

This is more financial planning than giving investing advice, which is probably more important. Seems like you have given them a very reasonable advice.

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  • 2 weeks later...

Thanks all! Lots of good perspectives. 

I'm leaning towards just letting it go... 

 

Hi John, thanks! 

Person is in his 60s. Wont need the money for another 4-5 years - perhaps longer.

He might be interested if I presented him with a deal. He'd just never go ahead himself. 

But I also think it's a bias for people who invest to not be able to see cash laying around like that! haha 😉 But seriously, I think it could be a good deal. But probably just gonna let it go. 

Edited by Aurelius
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I try to never proactively mix money and relationships. My 10-years in the industry has humbled me enough to know that I'm wrong quite a bit. It's not just about finding the right investment or companies - its also getting the timing right, the sizing right, and managing it versus other opportunities in the interim. 

 

Despite me never brining it up, I still have families members ask every once in awhile my thoughts on something or what I would recommend. The only investments I endorse are ones that I'm personally invested in and I spend more time discussing my prior mistakes and that I could be wrong here versus the investment itself. The hope is to disclose, disclose, disclose and hope they remember the disclosure if they choose to get involved and lose money. The hope is also that I will be losing more in those circumstances and was never paid for the advice. 

 

This approach has served me well so far - even through a few small misses - but I haven't had anyone invest in one of my blowups yet which would be the real test. 

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