Consider Ethics
My dear friends. I understand that some of you might have reservations about my previous article’s suggestion to raise capital for investments from family and close friends. Some voiced concerns that it is bothering on being unethical as we are placing our loved ones’ hard earned cash at risk at 0% interest rates. Logically, compared to taking a loan from anyone to buy luxury items like a car or to go on a holiday, borrowing to invest is extremely ethical.
If this still bothers you, and that you strongly believe in no free lunches, here are some suggestions to structure a loan program from family and close friends that I am personally using.
1. Matching Funds – To build trust, place a dollar for every dollar you loan into a fund pool. The fund should then be used only for investments and not allowed to be withdrawn unless mutually agreed with your debtors.
2. Attractive Interest Rates – give interest rates better than any fixed deposit but lower than prevailing loan rates. For me, I figured I was able to give 4% interest based on amount invested with me.
3. Capital Guarantee – I guarantee the capital invested along with the interest rates agreed. So in the event my investments fair poorly, I am still obligated for my pay outs. Hence the burden to perform is on me.
4. Annual Cash Out – all who invested has a chance to cash out once a year with no questions asked. But only once a year. On the flip side, they must stay with the fund for at least 1 year minimum.
Having the loan approved is only the beginning. The following instructions are harder to manage with these family linked debtors. However, if you can adhere to them, you will go a long way:
1. Invest wisely- this is your responsibility given the generosity of your loved ones. This also imply taking it like a man and do the right thing! No lazy investor ever got rich. Do your homework and have loads of patience.
2. Report performance yearly and no sooner - While this seems to run contrary to point 1, this is not so. All good intentions are often ill timed. So you owe it to them to focus on your investments and not be distracted by constant nagging from them. While they may operate on herd mentality, you need to be Joe cool under all circumstance to see opportunities others missed.
3. Pay out what you promised promptly – You do not know what lengths your family may have gone through just to raise that capital for you. It should be up to them to decide if they want to re-invest or enjoy the dividends. This is also a matter of trust. Deal fairly.
Thus with this method, I managed to build a fund for investing with relatively cheap cost of money with a very clear responsibility structure that builds mutual trust and understanding.
