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

People often frame this as either/or decision: angel invest or buy index funds. That framing is wrong. Index funds should be your foundation. Angel investing is potential addition for those who qualify and fit the profile.

This is the honest comparison to help you think about allocation correctly.

The Baseline Reality: Index Funds Win on Pure Finance

Index fund expected returns: 8-10% annually over long periods. S&P 500 has averaged approximately 10% over decades including dividends.

Angel investing expected returns: Median portfolios return 1.0-1.5x over 10 years, roughly 0-5% annualized. Top quartile achieves 2.5-4x, roughly 10-15% annualized.

The honest comparison: Median angel investor underperforms index funds. Top quartile roughly matches or slightly beats index funds. You're more likely to be median than top quartile.

Risk comparison: Index funds have moderate volatility but recover over time. Angel investing has extreme risk with 60-70% of individual investments returning zero and 25-30% of portfolios losing money overall.

Liquidity comparison: Index funds are liquid any trading day. Angel investments are locked for 7-10+ years with no access.

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."

On pure financial metrics, index funds are superior for most investors.

Why Anyone Would Choose Angel Investing

If index funds win financially, why angel invest at all?

Reason 1: Non-financial value Learning, networks, and engagement provide value that index funds cannot. For some investors, this non-financial value exceeds the financial underperformance versus index funds.

Reason 2: Outlier potential Top quartile angel portfolios can significantly outperform index funds. If you believe you can achieve top quartile through deal access, discipline, or other factors, the expected value calculation changes.

Reason 3: True diversification Angel investing has low correlation with public markets. Adding small allocation provides genuine portfolio diversification that index funds alone cannot achieve.

Reason 4: Personal interest Some people find angel investing genuinely engaging in ways that index fund investing cannot provide. The activity itself has value.

The Correct Framework: Foundation Plus Allocation

Wrong question: Should I angel invest OR buy index funds?

Right question: Should I add angel investing allocation to my index fund foundation?

The framework:

1. Build solid index fund foundation (retirement accounts, taxable accounts)
2. Ensure financial fundamentals are complete (emergency fund, debt management)
3. Then consider angel investing as small additional allocation (5-10% of liquid assets)

Index funds remain foundation regardless of angel investing decision. Angel investing is potential addition, not replacement.

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."

Those reps come from dedicated angel allocation, not from diverting index fund contributions.

When to Choose Index Funds Only

Scenario 1: Financial fundamentals incomplete Emergency fund not fully funded. Retirement contributions not maximized. High-interest debt exists. Focus on fundamentals first.

Scenario 2: Capital doesn't qualify as surplus Money would be missed if lost. Has other potential uses. Isn't genuinely extra. Keep in index funds.

Scenario 3: Time unavailable Can't commit 3-5 hours weekly for years. Schedule is already overcommitted. Index funds require minimal time.

Scenario 4: Risk tolerance insufficient Investment losses cause significant stress. Prefer certainty and predictability. Index funds match conservative to moderate profiles.

Scenario 5: No interest in startups Don't find business models interesting. Wouldn't value the learning. No career benefit from startup knowledge. Non-financial value doesn't apply.

Scenario 6: Pure financial optimization Only care about returns. Don't value non-financial benefits. Median angel returns don't justify the commitment.

When to Add Angel Investing Allocation

Scenario 1: Fundamentals are solid Index fund foundation established. Retirement on track. Emergency fund complete. Genuinely surplus capital available.

Scenario 2: Non-financial value matters Would value learning about startups. Network building is professionally relevant. Find engagement meaningful beyond returns.

Scenario 3: Time is available Can commit 3-5 hours weekly without significant sacrifice. Time would otherwise go to lower-value activities.

Scenario 4: Risk tolerance is high Comfortable with volatility and individual investment failures. Can maintain discipline through uncertainty.

Scenario 5: Genuine interest exists Find startups and business models fascinating. Would engage with content even without investment motivation.

Scenario 6: Portfolio diversification desired Want true diversification beyond public markets. Willing to accept illiquidity for low correlation benefit.

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

Interest in supporting diverse founders and learning from their journeys distinguishes angel investors from pure financial optimizers.

The Allocation Decision

If adding angel investing:

Recommended allocation: 5-10% of liquid investable assets. Large enough to build proper portfolio (20+ investments). Small enough to absorb complete loss without impact.

Minimum practical allocation: $15,000-20,000 total. Enables 15-20 investments at $1,000 each. Smaller amounts can't achieve adequate diversification.

Maximum prudent allocation: 10% of liquid assets. Angel investing shouldn't dominate portfolio regardless of enthusiasm.

Deployment timeline: 2-3 years to deploy full allocation. Quarterly investment pace. Not all at once.

Comparative Analysis by Investor Profile

Profile A: Young professional, moderate income, building wealth Index funds only. Fundamentals need priority. Angel investing premature until wealth accumulates.

Profile B: Established professional, high income, solid foundation Consider angel allocation. Fundamentals complete. Surplus capital available. Non-financial value likely relevant to career.

Profile C: Wealthy individual, diversified portfolio, financial security Angel allocation appropriate. True surplus available. Portfolio diversification valuable. Non-financial value is bonus.

Profile D: Near retirement, income-focused, capital preservation Index funds only. Timeline too short. Income needs don't match angel investing. Risk profile misaligned.

The Hybrid Approach in Practice

Year 1-5: Foundation building Maximize retirement contributions. Build taxable index fund portfolio. Complete emergency fund. Pay down debt.

Year 6+: Consider angel allocation If fundamentals solid and surplus exists, allocate 5-10% to angel investing. Maintain index fund foundation. Deploy angel allocation over 2-3 years.

Ongoing: Maintain both Continue index fund contributions. Manage angel portfolio. Rebalance index portion. Hold angel investments for full timeline.

The math example:

• $300,000 liquid portfolio (after years of index fund building)
• $270,000 remains in index funds (90%)
• $30,000 allocated to angel investing (10%)
• Angel allocation builds portfolio of 25-30 investments over 3 years
• Index fund foundation continues growing through contributions

The Honest Bottom Line

Should you angel invest or buy index funds?

Answer: Buy index funds. Then consider adding angel investing.

Index funds should be your default. They require minimal time, provide solid returns, offer complete liquidity, and match most risk profiles.

Angel investing is addition for specific people with specific profiles: solid foundation, genuine surplus, available time, high risk tolerance, and interest in non-financial value.

Don't choose between them. Build index fund foundation first. Add angel investing only when appropriate and only as small allocation.

Angel Squad serves those ready to add angel allocation: curated deal flow from Hustle Fund's pipeline provides quality opportunities, $1,000 minimums enable building diversified angel portfolio within appropriate allocation, and community infrastructure supports the engagement angel investing requires alongside your index fund foundation.

The question isn't either/or. It's whether you're ready to add angel investing to your already-solid index fund base.