Pooling Investments

Advantages.   By pooling investment resources in a private “mutual fund,” a family with a longer-term investment horizon can achieve economies of scale, participate in more attractive investment opportunities, and develop a more thoughtful investment process. Nonetheless, investors should not be permanently trapped in the pool just because they are related by blood or marriage. The price and conditions for withdrawal should respect the economic reliance interests of the remaining members, but withdrawal should not be prohibited completely. Example: Family members who pool their assets into a partnership for investment purposes might agree at the outset that redemptions will be permitted so members can cash out if they want to invest elsewhere, but only after a certain number of years, or at a specified discount from the net asset value. Alternatively, the family might form two funds, one that allows frequent redemptions and one that does not.

Life insurance.   Life insurance can be useful even when insurance is not needed to provide liquidity or replace lost wages.  For instance, life insurance can be used as a hedge against the loss of benefits from a lifetime gift plan that is cut short by the premature death of a donor. Private contracts can also be designed to serve the same purpose. Example: A family can construct private agreements between family trusts in order to provide for beneficiaries who need predictable regular returns, and for those who need to hedge against the loss of tax savings in an estate plan due to a premature death.

Investment horizon.   Assets that will not be consumed during a person’s lifetime should at some point be invested and managed with attention to the appropriate goals of those who will become the successor owners. The core wealth of individuals in one generation can be managed in an active business or private investment fund by using an investment perspective that crosses over to succeeding generations. Example: A senior family member who owns more assets than he or she could ever need to liquidate and spend may invest the “excess” portion in a long-term plan appropriate for the investment horizon of the next generation.

Alternative Investments.   Actively managed investments, including alternative investments, not only help produce superior investment results, but may provide business and career training opportunities for your successors. Example: “Angel investing” is hard work, but the experience can sharpen an investor’s judgment and analytical skills. Participating in such a process under the guidance of a mentor can be useful preparation for a wide variety of pursuits, far beyond learning how to make similar investments.