Be an Index Investor or Angel Investor?
Investing for cash flow, should you be an Index Investor or Angel Investor? It depends. Yes, it really depends on your goal, capital, risk appetite, and return expectation. Most investors are investing either ways or both through the life time.
What’s an Angel Investor?
Per Wikipedia, an angel investor or angel (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.
Per Working Bee’s definition, angel investor is the average individual who provides capital for local business communities, usually in exchange for a better investing and business environment for entrepreneurs and investors.
You don’t have to be super rich to be an angel… I mean angel investor.
You can start looking/networking at your local communities, for the sectors that interests you. You can invest a business based on the ideas, business models, products or service, growth potentials, and teams. As a private investor, you set your terms and look for the opportunities that match your criteria.
What’s Index Investor?
Index investors invest in the broad market using either mutual funds or ETF(Exchange Trade Fund). The goal here is not to beat the market, rather to get the overall market returns. Index ETF or mutual funds are the convenient investment vehicles that provide investors the most cost and tax efficient way to invest the overall public equity and bond markets.
So what kind of returns we are looking at between investing as a index investor and private investor?
For ETF Index Investor: They can enjoy the market returns. For instance, the total US stock market returns- VTI(Vanguard Total Stock Market ETF): +33.45% for 2013, – 36.98% for 2008. From 2002 to 2015, the average return is 6.97%. What does this mean? If you invest 100K in 2002, by the end of 2015, your portfolio balance is $257K.
For Accredited Angel Investor: Sky is the limit?
According to Kauffman Foundation Angel Returns Study in 2007, the overall multiple is 2.6X , average holding time is 3.5 years and average IRR is 27%. What does this mean? If you invest 100K, by the end of 3.5 years, you get $260K returned.
Of course, this is the average based on the study. It’s possible your can lose your shirts or you identify an early start up with 30X potentials and grab the opportunities!
For Private Angel Investor investing in local communities:
How about providing a business loan to the local business at 10% for 5 years? What does this mean? If you invest 100K, by the end of 5 years, you get $161K returned. You can closely monitor how the business is doing and you can control which business or company you want to invest.
For ETF Index Investor: From the period of 2002 to 2015, the dividend from VTI is between 1.19% in 2002(lowest) and 2.5% in 2009(highest).
For Accredited Angel Investor: very rare in the start up stage.
For Private Angel Investor investing in local communities: It depends on how you structure your deals. Cash flow is possible for the business that start making profits in the early stage.
Are you Index Investor or Angel Investor now? Feel free to share your insights!