So you put away some nice returns this year - not too shabby. While you can't be blamed for bragging about good performance, it's not uncommon for friends to want a part of the action. What would you do if a friend asked you to make investments on his or her behalf? In this article we'll show you the highs and lows of investing for others.

Tutorial: Investing 101: A Tutorial For Beginner Investors

Taking Advantage of Your Financial Knowledge
It's no surprise that your pals might want you to manage a couple of bucks for them. If you're pulling down decent returns and talking about your investing strategies, you've now become the go-to guy (or girl). These days, money talks and people who understand the financial world are getting a lot of respect as young people realize there's more to investing than they once thought. (The top-down investment strategy depends on economy and market strength. Find out what you should know in Technical Top-Down Investing.)

If you have financial knowledge, people who know you might view you as a very valuable commodity - a free money manager. All too often, the person asking you to invest his or her money is the person who knows a little something about investing - just enough to get into trouble. If you're nailing double-digit returns this year, why couldn't you repeat the performance year after year, right?

The Problems with Investing for Others
You may think that investing for someone else is just a way of helping out a friend, but the thing is, when you start investing for other people, particularly your friends, you enter a world of complications that you might not have foreseen when you started out.

Unrealistic Expectations
That friend of yours, the one who thinks that your 35% returns this year are going to happen next year as well, might be in for a nasty surprise when your picks make next to nothing. When you invest for friends, you have to deal with unrealistic expectations that can really put a damper on a relationship. If your friends wants you to invest for them, they likely don't understand all of the risks involved with investing, including not quite meeting the investment goals that they may have been projecting.

Losing a Friend's Money
Not meeting a friend's investing expectations could jeopardize your friendship, but falling short of your friend's projected returns could be a best-case scenario. When things go wrong, making some money is a lot better than losing money, which isn't an abstract concept for anyone who invests actively. When you bring money into a relationship, things can get uncomfortable pretty fast, especially when that money is hemorrhaging out of an investment account. Do you tell the friend to suck it up? Do you repay the person out of your pocket? Do you try to make up the difference with new picks? Really, there probably isn't a good way to deal with losing a friend's money and you should consider this risk before you agree to invest for anyone.

Legal Matters
Managing a friend's money is a sticky business and if you go through with it you may be breaking the law. Investment professionals must be registered with the Securities and Exchange Commission or have a federal license. They are heavily regulated by the government and by trade organizations like the National Association of Securities Dealers, for the protection of consumers. If you invest for a friend for compensation, you could be breaking laws that are in place to protect investors from people who aren't qualified to have discretionary control over others' accounts. (For more insight, see Policing The Securities Market: An Overview Of The SEC.)

Short End of the Stick
Despite the drawbacks, investing for friends isn't always doomed to failure. With skill, smarts and a whole lot of luck, you might rake in the cash. If that's the case, you still have to consider whether or not your friend is taking advantage of you. Helping out a friend is nice, but when that help consists of making significant amounts of money for that person and getting little or nothing in return, you might be suffering from an off-balance relationship. (For further reading, check out Choosing An Advisor: Wall Street Vs Main Street.)

What You Can Do for Friends
Now that I've taken the wind out of your sails, and your friend's as well, there are things that you can do to help your friends' investments without burdening yourself with the substantial responsibility of investing someone else's money. One of the best ways to lend a hand is to help teach your friend about investing.

Help Them Learn
There are a lot of pitfalls out there for new investors. If you're lucky, you've been able to avoid quite a few of them or you learned how you should have gone about avoiding them. The benefit of your experience can be one heck of an asset to pass on to a friend and it won't cost either one of you personally or financially. Therefore, if you want to help your friends, work with them; show them how to analyze a financial statement, how to execute a trade online, how to look up business news, or how to find online resources. (If you are interested in learning more on this subject, check out 20 Investments You Should Know.)

Investment Clubs
Going farther still, there is a popular way to invest hands-on with friends without taking on the responsibility that an investment advisor would feel for a client - the investment club. The investment club consists of a group of people who vote to decide whether or not to buy or sell their group-owned investments. Investment clubs are great, because they allow a more personal approach with actual investments than just helping someone with investing concepts. These clubs will also give you a vested interest in performance of your friend's portfolio.

If you're interested in starting an investment club, there are plenty of resources available, ranging from your broker to the internet. It's important to recognize that an investment club isn't just a couple of people who want to invest together - it's a formal (and legally defined) organization with members who have an equitable claim to their assets. This means you should look into the rules and laws that govern investment clubs where you live before joining or starting one yourself. (To learn more about investment clubs, see Investment Clubs Offer Experience And Insight and Get Active, Join a Club!)

The Bottom Line
Investing for a friend usually isn't worth the amount of trouble it can cause. Money just isn't something you want to bring into a good friendship. In the end, by helping your friends invest on their own, you'll be doing them, and yourself, a much bigger favor. (For more information on investing, see Investing With A Purpose and The Seasons Of An Investor's Life.)

Related Articles
  1. Insurance

    Investing In Your Child's Education

    Overwhelmed by increasing tuition costs for your kids? The U.S. government can help.
  2. Investing Basics

    The Lowdown On Penny Stocks

    Think penny stocks will make you rich? If you don't understand the risks, you could end up penniless.
  3. Active Trading Fundamentals

    Five Minute Investing Tutorial

    A tutorial for people who want to manage their portfolios aggressively without having it consume their lives.
  4. Investing

    Asset Manager Ethics: Acting With Competence and Diligence

    Managers must make investment decisions based on their personal investment process, which in turn should be based on solid research and due diligence.
  5. Professionals

    Common Interview Questions for Financial Auditors

    Identify questions commonly asked at financial auditor job interviews, and learn to formulate winning responses that give your candidacy a boost.
  6. Financial Advisors

    5 Things All Financial Advisors Should Know About ETFs

    Discover five things all financial advisors should know about ETFs, including when ETFs may be a better choice for your clients than mutual funds.
  7. Professionals

    Career Advice: Investment Banking Vs. Asset Management

    Compare and contrast investment banking and asset management as career opportunities, and understand which is a better fit based on your skill set and goals.
  8. Investing Basics

    Fee-Only Financial Advisors: What You Need To Know

    Are you considering hiring a fee-only financial advisor or one who is compensated via commissions? Read this first.
  9. Financial Advisors

    Becoming an Advisor: Why You Should Shadow a Pro

    Meeting with financial advisors and following them during a workday will help you to know if it’s worth the time and effort to make the career switch.
  10. Financial Advisors

    Financial Fraud: 6 Tips to Avoid It

    A good financial planner should work with you and for you. Ensure you are paying attention if you don't want to be the victim of fraud.
  1. Do financial advisors charge VATs?

    The Personal Finance Society (PFS) and with Her Majesty's Revenue and Customs (HMRC) have outlined when a value-added tax ... Read Full Answer >>
  2. How do financial advisors execute trades?

    Today, almost every investor invests through online brokerage accounts. Investors often believe that their trades are directly ... Read Full Answer >>
  3. How do financial advisors help you avoid escheatment?

    Financial advisors can help you avoid the escheatment of your financial assets by regularly reviewing all of your accounts, ... Read Full Answer >>
  4. Why do financial advisors dislike target-date funds?

    Financial advisors dislike target-date funds because these funds tend to charge high fees and have limited histories. It ... Read Full Answer >>
  5. What are working capital costs?

    Working capital costs (WCC) refer to the costs of maintaining daily operations at an organization. These costs take into ... Read Full Answer >>
  6. How often do financial advisors have to travel?

    The frequency with which a financial advisor needs to travel varies according to numerous factors, such as the size and location ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center