The Exempt Market is at higher risk, and so it can be expected that, at some point in time, you may experience an investment loss. Whether it is a large or small investment, losses can be very hard to deal with. This is particularly true in the Exempt Market for a couple of reasons being (1) when an issuer runs into trouble; the losses can be quite significant, and (2) more often than not, losses can take a significant amount of time to realize.
With a stock, even if you are in a negative situation, you can still sell the stock and realize the loss. You will likely still feel the same dismay at having lost money, but it has happened, and you can move on. With private securities in the Exempt Market, the process can take a long time to wind everything down and crystallize what (if anything) you will be receiving back. This tends to make it feel even worse because you continue to feel the loss through the whole wind-up process.
So, if things don’t go as planned and you lose money in the Exempt Market, should you continue to invest there in the future?
First Step – Reassess Where You Are At
Things change over time, and it’s likely that your situation now is different than when you originally invested. Here are 3 key things to consider right from the start:
(1) Your Financial Status
It’s certainly possible that there have been some changes here, particularly if you made the original investment several years ago. This review is important both to determine if you have funds available that you’d like to invest and also to determine if your “eligible” or “accredited” investor status has changed.
(2) Your Current Allocation to the Exempt Market
In the past, there were not a lot of guidelines here – for Dealing Representatives or Investors. There were no investment caps and no formal recommendations about how much an eligible investor should place in Exempt Market securities. There was also not a lot of history yet to guide these decisions. In today’s Exempt Market, the Exempt Market Dealers make these recommendations for investors.
(3) Your Current Situation & Financial Objectives
Some key things to look at here are your age, your time horizon for investing and your risk tolerance. It’s important to reassess the first two if you are nearing (or in) retirement and to reassess your risk tolerance. It may have changed now that you have experience in the market and have seen some of the challenges over the years.
Second Step – Reassess Your Opinion of the Exempt Market Overall
Even though you can invest more in the Exempt Market, after experiencing a loss, you might question why you would want to. The first thing to remember is that investing has risks. Investments lose value or fail. Investors can lose money. This is true of almost any type of investment and particularly in a high-risk market. There will be gains, and there will be losses, as this is the nature of investing.
Fortunately, the exempt market continuously evolves and improves. Private investing is still very new to the average “eligible” investor. Generally, the ability to invest privately became mainstream around 2005 – 2008 and returned strongly in 2011/2012. Every failed issuer and investment leads to the market becoming stronger and more transparent for investors.
The Exempt Market Today
Today’s exempt market offers issuers that are experienced with strong track records. Nothing is ever guaranteed, but over the years – as the Exempt Market has continued to evolve – investors now have access to some of the best private investment opportunities that are available in this higher-risk space. Spreading your capital out among several issuers helps to mitigate your risk. With multiple, strong, experienced issuers in this market now, that is easier to do.
Today’s exempt market offerings have a lot more options, including regular returns, early redemption options, various terms and different industries. Ensure you have an experienced Dealing Representative who works with a strong Exempt Market Dealer. This becomes extremely important as time goes on. A strong Exempt Market Dealer will perform extensive diligence on the issuers and investments and have a track record to prove that. An experienced Dealing Representative will have seen all sides of the Exempt Market and will work in your best interests.
Any type of investment loss can be hard to take but hang in there, reassess and re-evaluate.
This article was originally posted on https://shannonpineau.com/ and updated for Educate & Explore