I think most people are familiar with modern portfolio theory and the related notions of managing the risk/return of your investments through diversification, asset allocation and re-balancing. Well, how does this view of one's finances relate to angel investments or other early-stage investing?
My recommendation to Investor-Members is that they take a cold, hard look at their investments and see where their portfolios stand -- especially if that exercise hasn't been done recently. First, what is your asset allocation, broadly speaking among stocks, bonds, real estate and "alternative" investments like commodities (e.g., gold), hedge funds, and private equity investments? Specifically, how much of your portfolio is invested in the class of "alternative assets" known as angel investments?
Depending on your overarching financial planning goals (college fundings, retirement, increased passive income, other goals), you will want to allocate your investable portfolio among stocks, bonds, real estate and alternative investments with different weightings. The key to success is to keep your allocations reasonably constant and make sure you diversify both across asset classes and within each asset class.
I believe the "alternative asset" class should probably be somewhere between 5% and 15% of your total investible net worth, depending on your financial goals and risk/return tolerance. (The allocation of Yale's endowment just moved to 26% for this asset class, but they have a longer time horizon than we humans do!) And within that "alternative asset" class, I believe investing in private equity of the sort we are doing here is a good choice, especially if you can diversify over at least 7 investments.
