I always have had a small bone to pick with the people who offer generic personal finance advice. They mean well. And for most of their readers, the suggestion that people—especially when they are young—should have a disproportionate amount of their wealth in public equities makes sense.
That’s typically good advice for most people.
But you are not like most people.
You are trying to grow your home business. And growing any business is risky. That’s just the nature of entrepreneurship. You don’t need to double down on that risk by putting all, most, or even a substantial amount of your money into stocks (which would be the traditional course for others who don’t have the opportunities—and risks—associated with owning a small business.)
Yes, of course. Over time, stocks have outperformed the more conservative choices such as bonds and cash equivalents like CDs and money market funds. But with those higher potential rewards comes higher risk, and you may have, as the folks on Wall Street say, a much better risk adjusted opportunity—your business.
Let me explain. I run an organization comprised of over 550 of the most successful entrepreneurs in North America. They made most of their money from their businesses, not their investments. (In fact, most of them are mediocre investors. Different horses for different courses.)
Here’s where I come out. The asset with the most potential in an entrepreneur’s portfolio should be their business. For most successful entrepreneurs, the return they earn on the capital invested in their business dwarves the returns they can achieve anywhere else.
Let me give you a simple example of that. If you invest $10,000 in the stock market for 20 years you might have an expected annual return of 8%. That investment will grow to $46,600 over 20 years, if you earn that 8% return. But if you invest $10,000 in your own business and can generate a 16% return over the same 20 years the investment could grow to $194,600. By doubling the return, the earnings are over 4 times as much!
No matter how many zeros are at the end of the investment, the takeaway is clear that if you own your own business, and the business has potential, the investment with the biggest upside is likely your own, and that is where you should focus.
But don’t confuse having your business be your “risk” asset with investing all your eggs in one basket. I am suggesting the opposite. Most entrepreneurs succeed because they have an unusual level of self-discipline and are able to save enough money to weather the inevitable storms they will face. People who are not willing to live modestly and forego the temptations that will erode a bank account are probably not going to be successful entrepreneurs.
What I am suggesting is that you squirrel away as much money in low risk places, like bank accounts, highly-rated, relatively short term bonds, and money funds, and avoid making investments which could lose your precious capital just when you might need it for your business.
The money you tie up (or even lose) in other risky investments might prevent you from having the capital you need to save or grow your business when that might be the best long term opportunity you will ever have- especially, just when you might need it most.
If your own business isn’t your best opportunity, you might think about why you are in that business in the first place.
Your Course of Action for Now
If you take the route I am recommending you will actually end up with a diversified portfolio, just one that looks different than the one held by your friends who get all their income from a corporate paycheck. And you will need to define that portfolio a bit differently as well.
The conservative portion of your portfolio will be in bonds and cash equivalents. You may even want to have a percentage of your holdings in traditional stocks- maybe even dividend paying stocks. I am deliberately not specifying percentages because I don’t want to be guilty of advocating a one-size-fits-all approach that I complained about at the very beginning. But personally, I really do believe entrepreneurs with potentially successful businesses should avoid investing in other risky assets until their own business has grown big enough and is on solid enough ground that there is very little chance these other assets will be called on to save or grow the business.
Where your friends might generally have just three kinds of investments—stocks, bonds and cash—you will have a fourth, the equity in your own company.
Be as aggressive growing your company as you are comfortable with—knowing the rest of your portfolio has been designed to offset the risk. That kind of discipline multiplies the chances for success over the long term.
