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2020/10/30

How to Make a Smart Investment Plan

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How to Make a Smart Investment Plan

Mark FordBy Mark Ford
 
Knowing what the current and historic returns are for every type of investment, the smart investor will curtail his ambitions to what is reasonable to expect.

For example, the smart investor plans to get 8% to 12% on his stock portfolio over time. He doesn't try to get much more than that. He knows that if he does try, he will probably make much less. (Studies show he'll probably make only 2% to 3%.)

The same is true of every other asset class - government securities, corporate bonds, convertible bonds, natural resource stocks, penny stocks, private placement deals, commodities, currencies, real estate, etc. Trying to do much better than general market averages is foolish.

Let's look at real estate as an illustration.
 
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Over a period of maybe 20 years, I invested in six or eight deals with E.P., a trusted friend, who built high-end residential communities. The investments I made were as a partner in a limited liability company (LLC).

I was a limited partner, which means I invested a sum of money in exchange for a percentage of the deal. E.P. and his partner were general partners. They put the deal together, built the development, sold it and got a nice piece of the profits even if they didn't put in any money.

As limited partners, we put up a good chunk of the capital needed to get the project going. We got most of the benefits we would have gotten from developing real estate ourselves, but with two advantages:

  1. We didn't have to run the business.
  2. Our risk was limited to the money we put in.
The downside was that we had to pay E.P. and his partner fees for everything they did.

Overall, I did reasonably well for that sort of investment strategy. If I had to guess, I'd say my annual return on investment (ROI) amounted to about 12%. But the individual results varied widely. On one deal, I doubled my money in less than two years. On another, I made a 60% return in three years. One deal went broke, and I got nothing back. The results of the rest were somewhere in between.

In all of them, the management group was the same, the deals were structured pretty much the same and the developments were all in South Florida. So why were my results so varied?

It was because of factors that I had never considered.
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