Brian Nichols is the co-founder of Angel Squad, a community where you’ll learn how to angel invest and get a chance to invest as little as $1k into Hustle Fund's top performing early-stage startups

Most "should I angel invest" discussions focus on the activity itself. But angel investing is also a portfolio allocation decision that should be evaluated within your broader investment strategy.

This is the portfolio-focused analysis for determining whether angel investing belongs in your investment mix.

Angel Investing as Asset Class

Return characteristics:

• Median return: 1.0-1.5x over 10 years (roughly 0-5% annualized)
• Top quartile return: 2.5-4x over 10 years (roughly 10-15% annualized)
• Return distribution: Highly skewed with most returns from few investments

Risk characteristics:

• Individual investment risk: Very high (60-70% complete loss)
• Portfolio risk: High (25-30% of portfolios lose money overall)
• Illiquidity risk: Extreme (7-10+ year lock)

Correlation characteristics:

• Low correlation with public equities
• Low correlation with fixed income
• Moderate correlation with private equity/venture capital
• Potential diversification benefit for overall portfolio

As Elizabeth Yin, co-founder and GP of Hustle Fund, explains: "Most of your investments will return $0. You will lose money. So it's important to have great portfolio construction."

As asset class, angel investing has specific characteristics that must fit your overall strategy.

Portfolio Fit Assessment

Question 1: What's your overall portfolio size?

Angel investing makes sense as small allocation (5-10%) of substantial portfolio. For $500,000 portfolio, that's $25,000-50,000. For $200,000 portfolio, that's $10,000-20,000.

Fit assessment:

• Portfolio under $150,000: Angel investing may be too large as percentage. Consider waiting until portfolio grows.
• Portfolio $150,000-500,000: Angel investing can be appropriate small allocation.
• Portfolio over $500,000: Angel investing fits comfortably as alternative allocation.

Question 2: What's your current asset allocation?

Review existing allocation across equities, fixed income, real estate, and alternatives. Angel investing adds to alternatives bucket.

Fit assessment:

• Heavy alternatives already (20%+): Adding angel investing increases concentration in illiquid assets.
• Moderate alternatives (10-20%): Angel investing can complement existing alternative exposure.
• Light alternatives (under 10%): Angel investing adds diversification benefit.

Question 3: What's your liquidity position?

Angel investing is completely illiquid for 7-10+ years. Ensure sufficient liquidity elsewhere.

Fit assessment:

• Highly liquid portfolio (80%+ accessible): Can accommodate illiquid angel allocation.
• Moderately liquid (60-80% accessible): Angel investing should be small allocation.
• Already illiquid (under 60% accessible): Additional illiquidity may be inappropriate.

Risk Profile Alignment

Conservative risk profile: Angel investing is generally inappropriate. High individual loss rates and portfolio risk exceed conservative tolerance. Alternatives: bond allocation, dividend stocks, conservative balanced funds.

Moderate risk profile: Angel investing may be appropriate as very small allocation (3-5% maximum). Must be genuinely surplus capital with loss having no impact. Requires careful fit assessment.

Aggressive risk profile: Angel investing can be appropriate as meaningful allocation (5-10%). Risk profile aligns with high-risk, high-potential-reward characteristics. Still requires diversification within angel portfolio.

As Eric Bahn, co-founder and GP of Hustle Fund, emphasizes: "For beginners, a bigger startup portfolio is better. It helps with diversification and helps you learn and get reps in. Investing requires practice like everything else."

Even within aggressive allocation, diversification within angel portfolio is essential.

Investment Policy Considerations

Time horizon alignment: Angel investing requires 10-year minimum horizon. If portfolio has shorter-term goals (home purchase, education funding, early retirement), angel allocation may conflict.

Assessment:

• All goals 10+ years away: Angel investing fits timeline.
• Mixed timeline goals: Ensure angel allocation doesn't compete with nearer-term needs.
• Significant near-term goals: Angel investing may be inappropriate currently.

Income requirements: Angel investing produces no current income. All returns come at exit, years in future.

Assessment:

• No portfolio income needs: Angel investing fits.
• Partial income needs: Ensure other assets cover income requirements.
• Significant income needs: Angel investing is poor fit.

Rebalancing considerations: Angel investments can't be rebalanced. No selling to reduce allocation. Can only add, not subtract.

Assessment:

• Flexible rebalancing approach: Can accommodate fixed allocation.
• Strict rebalancing discipline: Angel investing creates complications.

Diversification Analysis

Correlation benefit: Angel investing has low correlation with public markets. Provides genuine diversification versus stocks and bonds.

However: Diversification benefit requires sufficient allocation to matter. 2% allocation provides minimal diversification impact. 5-10% allocation provides meaningful benefit.

Diversification cost: Angel investing itself requires diversification (20+ investments). Diversifying the diversifier adds complexity.

Net assessment: Angel investing provides portfolio diversification benefit if allocation is meaningful (5-10%) and angel portfolio itself is properly diversified (20+ investments).

As Shiyan Koh, co-founder and GP of Hustle Fund, notes: "Great founders can look like anyone and come from anywhere."

Portfolio diversification includes exposure to diverse founders and opportunities through angel investing.

Allocation Sizing

Minimum meaningful allocation: $15,000-20,000 (enabling 15-20 investments at $1,000 each). Smaller amounts can't build adequate diversification.

Maximum prudent allocation: 10% of liquid portfolio. Angel investing shouldn't dominate overall allocation regardless of risk tolerance.

Recommended range: 5-10% of liquid portfolio for appropriate investors. Large enough to matter, small enough to absorb complete loss.

Calculation example:

• $300,000 liquid portfolio
• 5-10% allocation = $15,000-30,000
• Enables 15-30 investments at $1,000 each
• Provides diversification benefit while limiting downside exposure

Portfolio Integration Strategy

Approach 1: Dedicated allocation Set aside specific amount ($20,000) for angel investing. Deploy over 2-3 years. Don't count toward other investment goals.

Approach 2: Alternative assets bucket Include angel investing within broader alternatives allocation (10-20% of portfolio). Balance against other alternatives (real estate, private equity funds, etc.).

Approach 3: Opportunistic allocation No set allocation. Invest when genuinely surplus capital accumulates. More flexible but harder to build adequate diversification.

Recommended: Dedicated allocation ensures proper portfolio construction and clear role in overall strategy.

When Angel Investing Doesn't Fit Portfolio

Portfolio too small: Under $150,000 liquid assets. Angel investing would be too large as percentage.

Alternative: Wait until portfolio grows. Use time to build knowledge for future participation.

Liquidity constraints: Already significant illiquid assets. Additional illiquidity inappropriate.

Alternative: Consider more liquid startup exposure (public startup ETFs, secondary market platforms).

Timeline mismatch: Significant goals within 10 years. Angel investing timeline doesn't align.

Alternative: Address shorter-term goals first. Revisit angel investing when timeline clears.

Risk profile mismatch: Conservative or moderately conservative profile. Angel investing risk exceeds tolerance.

Alternative: Venture capital funds with professional management may provide startup exposure with better risk management.

Making the Portfolio Decision

Angel investing fits your portfolio if:

• Portfolio size supports 5-10% allocation ($15,000-25,000 minimum)
• Risk profile is moderate-aggressive or aggressive
• Time horizon extends 10+ years for this allocation
• Liquidity position can absorb illiquid investment
• Current alternatives allocation has room for addition

Angel investing doesn't fit your portfolio if:

• Portfolio is too small for meaningful allocation
• Risk profile is conservative
• Timeline includes significant goals within 10 years
• Liquidity is already constrained
• Alternatives allocation is already heavy

Angel Squad serves those whose portfolio analysis supports angel investing: $1,000 investment minimums enable building diversified angel portfolio within appropriate allocation, curated deal flow from Hustle Fund's pipeline provides quality opportunities for deployment, and community infrastructure supports the sustained engagement proper portfolio management requires.

The portfolio decision is distinct from the personal interest decision. Even if angel investing appeals to you personally, it must fit your portfolio to be appropriate allocation.