Don’t Chase Returns Before Doing Your Homework

A recent SEC rules change is about to make it easier to become an accredited investor. What will newly eligible people do with their new freedom? I hope they’ll be smart.

Investor accreditation is legally required for many non-public investments, like hedge funds and private equity funds. This requirement is supposed to protect less sophisticated investors from making risky decisions, and there is certainly merit to that.

There is a trade-off between the paternalism of protecting people from their own mistakes versus the freedom of personal responsibility for people to make their own choices about how to invest their own money.

Non-traditional investments can be a great addition to a broader portfolio. But most of this newly accredited pool of investors should think very carefully before diving in.

These investments often come with higher (or different) risks, higher fees (with some firms) and often longer timelines where your capital is not available.

For many small investors, a traditional path, like index funds, is probably the better choice.

I’ll be very interested to see what sorts of firms go after this new pool of accredited investors. Companies that specifically target smaller accredited investors will likely have a highly tailored business model. I’d be wary that they might offer a lot more marketing sizzle than actual returns on investment. I can’t help thinking about the recent surge in Robinhood users.

As a matter of principle, I support this rule change. The old SEC limits are arbitrary, and investors should be free to choose their own paths. But that freedom comes with responsibility. Do your homework, understand the risks, fees, and lockup periods of any new investment. Never chase returns that you don’t fully understand.

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