We know we don’t need to tell you that diversifying your portfolio is the most important principle of investing.
There’s no better way to broaden opportunity and stabilise returns.
But let's look at how you can do that by incorporating equity crowdfunding (CSF) campaigns into your investment strategy.
Benefits of diversifying with equity crowdfunding opportunities
- They're personal and engaging. Investing in a startup comes from a more personal place than mainstream investing. CSF’s explosion in popularity means there is a vast number of projects to choose from. This is an opportunity to use your market knowledge, forecasting skills, and personal taste to select a startup, and back them as they progress.
- They're riskier, but offer higher potential rewards. You might have a nice portfolio of blue chip ASX stocks or ETFs ticking over, but if you keep the risk tolerance too low, your expected return might also be lower.
Participating in an equity crowdfunding campaign can be a supplementary chance to boost returns.
Say you invest in ten equity crowdfunding opportunities at $1,000 each – an outlay of $10,000 in total. Eight of these companies fail, one of them is a moderate success and triples in value, while one of them is a large success and increases in value by twenty times. This would see your CSF portfolio rise to $24,000 – nearly 2.5x your initial outlay, despite a failure rate of 80%.
This is exactly how the VC model works, which typically expects 1 to 2 big wins per 10 investments.
What to look out for when adding crowdfunded campaigns to your portfolio
- Beware of hot trends. One of the biggest pulls about crowdfunding is the buzz and the FOMO that comes with it. But although trends can skyrocket in value, they don’t always last. Even if they do, ask: does it suit my portfolio goals?
- Don’t be tempted to jump industries. The democratic nature of equity crowdfunding means that anyone can enter the market. Even if you’re a seasoned investor, it’s still crucial to have an understanding of the sector you’re investing in - its reach, its potential, its trajectory, and its sustainability.
- Maintain balance. Yes, it is very possible that companies you invest in will fail to generate you returns via a dividend, acquisition or public listing. This is why it is important to limit the exposure to early-stage companies within your portfolio. The majority of funds should remain in more risk-proof assets.
Following the "barbell" investing strategy is a good option – essentially allocating 90% of your portfolio to low-risk assets, and the remaining 10% to high-risk opportunities like CSF, hoping for a big payoff.
To sum up
Diversifying doesn’t mean buying up lots of investments just to get the numbers up. It means harmonising the balance between varied opportunities (or in other, more cliched words - not putting all your eggs in one basket).
Unlike many passive income streams, equity crowdfunding campaigns will require your engagement and support.
But quality beats quantity - being an active investor in a start-up is different, exciting, and adds another string to your investing bow.
STAX makes it easy to diversify your investments:
- Access detailed information about carefully selected, high-potential Aussie businesses looking to grow.
- Read clear information including descriptions of the problem the company is solving, their solution, the wider market and business plan.
- Get started today with small, affordable investments which enable easy diversification.