Investing in horses is not for the faint of heart, and advisors should let interested clients know that, observers say.

Investing in thoroughbred racehorses can be done either through buying racing stock or breeding horses with the hope of making a return on investment, says Barry Irwin, founder and chief executive of Team Valor International, an American Thoroughbred horse racing stable in Versailles, Kentucky.

“Since 90% of racehorse owners lose money every year, this is something people can do with their discretionary funds. They need to just have some fun with it,” Irwin says.

Advisors should tell clients to conduct due diligence before they put up the money, speaking with the seller, preferably in person, and getting references, he says.

“I don’t want to have anything to do with impulse buys, because people get into trouble and are not happy,” Irwin says.

Terrance Martin, managing partner at Tranquility Financial Planning in McAllen, Texas, says that if a client expresses an interest in investing in horses, he would treat the investment as part of the firm’s “satellite approach,” so the core portfolio would not be disrupted.

He says he would complete the net present value and internal rate of return analysis to determine if it would be a viable option for the client’s overall portfolio and would then make recommendations accordingly.

“If the horse investment is a viable option, we would further evaluate these streams of income to determine if these receipts are more stock-like or bond-like,” Martin says. “We would then make adjustments to the overall portfolio to ensure that we are accounting for these streams of income and continue to maintain an overall allocation consistent with their risk tolerance.”

Robert Pagliarini, a CFP and president of Pacifica Wealth Advisors in Mission Viejo, California, says he lets his clients know that he has no expertise in investing in horses and so he couldn’t “possibly effectively evaluate all of the pros and cons.”

“But I then do my best to let them know the risks of the investment,” he says. “I see my value in these situations as not being a passive cheerleader for the investment but helping them see some of the challenges, inappropriate projections, or weaknesses in the deal.”

Catherine Seeber, a CFP and a vice president and advisor at CAPTRUST in Doylestown, Pennsylvania, says that the only money she would recommend putting toward investing in horses is discretionary money that a client would be comfortable losing.

“If you love the world of horses, buy them out of love, not for money,” she says.

This story is part of a 30-30 series on navigating the growing world of choices for client portfolios.