A portfolio approach to friends and family lending

Aug 18, 2020

Generally, when people consider loans to others they know and trust, they think about the arrangement in isolation instead of considering how it should relate to their existing portfolio of assets and liabilities. People tend to ask themselves "Can I afford to give away $X?"

Thinking about the loan as a gift or an expense is a mistake though. Loans, either managed yourself, or made in the form of a bond investment, are assets that provide reliable cash flows over time. And loans made to trusted individuals carry potential risks and rewards that should be considered in concert with all other financial elements of the lender's life.

In the current market, odds are good that a loan you make to someone else will be easily able to out-perform comparable investments without causing an unnecessary financial burden for the borrower. Bond funds today are yielding less than 1.7%, while most borrowers are paying above 5% on student loans, and far more on other types of debt.

Replacing a portion of your fixed income investments with a personal loan to someone you trust can provide your portfolio with a much needed stable cash flow boost over the negative real yields seen in much of the fixed income market today.