From Maryland, United States, CNNMoney retirement savings consultant Walter Updegrave received the following query: I am 63 years old and have $ 500,000 in my retirement account. I am thinking of taking $ 100,000 to invest in a new business that will grow, process, and sell marijuana. Is it a good idea?
The expert’s response was: “I know that many investors see the potential to reap high returns as more states legalize marijuana in the United States. But unless you want to risk losing a significant portion of your savings (and your prospects for a secure retirement), I recommend against investing in that marijuana startup. ”
Why did you give him this answer? On the one hand, investing in any new business involves more risk than investing in a consolidated company and, therefore, it needs to be approached with extreme caution, especially when talking about your retirement savings.
For Updegrave cannabis-related companies pose a higher level of risk than the typical startup.
A business in the making
Colorado is one of the most liberal states regarding the use of marijuana since it allows both types of consumption: both medicinal and recreational.First, there are still important legal issues that have to be resolved. Although the states decide on the legality of cannabis “Marijuana use remains a crime under federal law, ” according to the Office of Policy National Drug Control.
That office also warns that marijuana is a controlled substance and that the Department of Justice “has as its mission to enforce the Controlled Substances Act.” If the authorities take a hostile stance against medical and/or recreational marijuana use in the future (or even become less accommodating), the growth prospects for this business could deteriorate significantly.
It should also be borne in mind that a budding industry like this is attracting and will continue to attract dozens of entrepreneurs, speculators, developers and all kinds of operators who expect to enter the business from the beginning.
That is fine if the investor is lucky in choosing a company, but it is not that simple. People often remember startups that were successful and forget the most numerous failures. You have to think about the dozens of IPOs that attracted millions of dollars from investors in the late 1990s just to get their bites out of the dot-com crisis earlier this century.
Even in cases where a new industry later became an engine of economic growth, it does not necessarily imply that the first investors made money.
Detractors of the industry
In the fledgling years of the auto industry, for example, hundreds of automakers failed, many even before putting a car on the market. So even if the future growth of the industry goes well, there is still a risk that you won’t make money from an investment in that sector, Walter Updegrave explained.
Private equity firms and other institutional investors can cope with such risk by detecting weeds in their industry research. They can thus distribute their money among a dozen or more companies that they have analyzed and consider to be in a better position to capitalize on opportunities. The hope is to be able to score a success on at least one or two investments.
But people who have only $ 100,000 to invest cannot take this approach. It is prohibitively expensive, time-consuming, and requires a level of experience and analytical skill that most individual investors do not possess.
Of course, there are also dozens of publicly-traded cannabis companies. And if the investor wants to track cannabis stocks as a whole, you can do so by monitoring the MJIC Marijuana Index.
“I suppose you can invest your savings in marijuana companies by buying some of those shares. But I wouldn’t recommend that option either. Most of these companies have small market capitalizations, which means they can be very volatile and, in my opinion, they are ideal only for investors willing to take well above average risks, ”he said.
At the center of the debate
Let’s be honest, he added: Most people are not attracted to the marijuana business because they have done a rigorous analysis of their growth prospects compared to other industries and have found that cannabis companies are attractively priced. in relation to your potential earnings.
No, rather it attracts them because it has generated a lot of press, debate and public attention. But something that is fashionable and on everyone’s lips is not a reason to invest. In any case, the more fuss surrounding a company or an industry, the lower your chances of being a profitable investment.
In conclusion: “Because of your age and the amount of your savings, I suggest that you give up investing in the marijuana business and instead keep your retirement savings in a portfolio that combines stocks and bond mutual funds (preferably index funds ) that are more in line with your risk tolerance. This approach is more boring, but less likely to end in a bad trip. “