How Entrepreneurs Can Balance Their Investment Portfolio

Entrepreneurs are inherently risk takers, it’s part of our DNA.  So how should you balance your investment portfolio when you are starting your next venture?  Should your investments be balanced differently if you have already scaled your company?  There are a lot of nuances in how you should have your money allocated, which are based upon your unique situation.

As someone who has investments, is a business owner, and also specializes working with entrepreneurs & business owners, it has been my experience that there are some commonalities we share when investing our money, especially depending on what stage our business is at.  The following tips and suggestions should help give you an idea of what your fellow ‘treps are doing while giving you a fresh look at your own situation.

First, let me explain some fundamentals of investing and common strategies that you can utilize.  This will give you context and a base of knowledge for the tips specific to entrepreneurs.

Fundamentals of Long Term Investing

Asset Allocation

Arguably one of the most well-known and used strategies for investing your money, asset allocation is essentially the balance of stocks, bonds, and cash in your portfolio.  It is a strategy used to balance risk and reward, based upon your risk tolerance and time horizon, to help you achieve the investment returns you determine are needed to meet your future goals.

Diversification

Drilling a little deeper is the strategy of diversification, which is meant to further help you balance risk and reward.  Using this strategy one would make sure to use a variety of stocks & bonds within their overall allocation.

For example, if you have determined that 70% of your portfolio should be invested in equities (stocks) and 30% in fixed income (bonds), then the next step would be to diversify those allocations.  In other words, for the 70% in stocks, you would need to pick what % should be in large, mid, small, and international stocks (companies).  You would also need to determine what % of different type bonds should be in your fixed income portion.

Diversification allows you to spread your risk over many asset classes and sectors, versus being concentrated in one area.

Now, there is certainly the contrarian view that an active trader would focus on staying in a certain sector, like health tech stocks for example, and this can be extremely rewarding, but it also comes with substantially more risk.  So, if you have the time to research and trade your portfolio full time, then there is definitely an argument for doing so.  But given how busy entrepreneurs tend to be, they rarely have the time to focus on a strategy like this.

Rebalancing

Once you have determined the asset allocation and diversification %’s for your portfolio, it is not something you just set and forget.  Perhaps you are putting money in on a regular basis, also known as dollar cost averaging, or the markets simply do what they do which will affect your %’s.  This is normal.  Using the strategies above, you will own a variety of stocks and bonds, some will do well, some won’t, and this changes constantly.  We have no control over this, however we can control your asset allocation, diversification, and how often you rebalance your %’s.

For example, your original mix of 70% stocks & 30% bonds has shifted due to the markets moving (this is also known as drift), by having a rebalancing plan in place (which can be set up to be automatic) your account will essentially look at itself on a regular basis (monthly, quarterly, annually, etc) and check to see if your %’s are still what they should be, if they aren’t, then it will automatically shift it back to your preset %’s.

Think of it this way, your 70% went up to 80%, which means your 30% went down to 20%.  When the rebalancing occurs you are essentially selling the investments that did well (selling high), and shifting that money over to buy the investments that went down (buying low), bringing you back to 70% & 30%.

Long term, using these strategies in combination has shown to work very well, although nothing is a guarantee of future performance, being able to control variables like these certainly can positively impact your long term investment performance.  What you need to determine is your risk tolerance & time horizon, these will help you figure out what your %’s should be and give you a base line to work from moving forward.

*Asset allocation, diversification, and rebalancing do not ensure a profit or protect against a loss, but is intended to help you manage your goals and risk tolerance.

4 Tips for Entrepreneurs on how to balance their investment portfolio

Being an entrepreneur, business owner, founder, etc. brings with it a unique set of challenges when trying to figure out how you should balance your investment portfolio.  Perhaps you are just starting your next venture and might need to take money out of your retirement and investment portfolios to help fund it.  Perhaps your startup is scaling and becoming your most valuable asset.  Things like these should be taken into consideration when thinking about your investments.  Here are some tips that may help you be better prepared:

1. Consider Being Conservative

If there is a possibility that you will need to withdraw money from your IRA, 401k, etc. to fund your business during the startup phase, then the last thing you need is the markets tanking just before you take out your money, leaving you with much less capital than you planned on.  Thus, looking at a portfolio mainly comprised of bonds, or even money markets holdings, will bring the risk way down for your portfolio.  Although still not guaranteed, this could make all the difference when you need the money the most.

Keep in mind that if you take money out of an IRA, 401k, etc. that there may be taxes and penalties.  Make sure you look into this before taking the money out.

2. Find Professional Help

It has been my experience that my clients who are entrepreneurs are already stretched for time.  Thus they rarely have the time to review their investments, especially how they fit into the bigger picture of their ever changing life.  Having a professional to work with is essentially outsourcing a service that you no longer need to worry about, although still make sure to have regularly scheduled check-ins to make sure you are on track.

3. Be Selfish

Investing, figuring out your asset allocation, diversification, and rebalancing strategy all can be a drain on your mental reserves.  Entrepreneurs especially are already thinking about a million things for their business, so having their investments on their mind is simply one more thing chipping away at your mental capacity to get things done. 

So, be selfish.  Set aside an hour, figure out what your investing strategies should be, put them into place, and then go back to doing what you love and are passionate about.  I have found that delaying decisions like this tend to be more of a distraction then just spending the time on them to begin with.  Once you get it sorted out, you can then take it off your mental list and go back to doing what is most important to you.  The better you take care of yourself, including your finances, the better prepared you will be to take care of the more pressing things in your life. 

An example I always like to share is that when you are flying, and the flight attendant is doing their pre-flight safety announcement, they mention that if the oxygen masks deploy, to take care of yours first, before helping the people next to you.  What they are saying is that if you don’t take care of yourself first, then you may pass out, making you completely useless to those around you.  So, be selfish and take care of yourself first!

4. Treat your Business as an Investment

Have you made it past the stressful startup stage of your business?  Are you starting to scale, measuring your business growth each year in multiples of X?  Congratulations!  However, this does present a new unique challenge and planning opportunity for your overall investment strategy.  Your business is starting to dominate your overall net worth, growing faster than any other investment you own, yet it is also the riskiest and most illiquid asset you own.

It is common for most people to not include their business in their overall investment planning.  The challenge is to think of your business as a stock, a piece of your overall portfolio.  Once you have this mind shift it is important to think about your investment strategy and if you still want to be as aggressive with the rest of your investments.

It has been my experience that founders who find themselves in this position tend to do two things with their money.  One, they still take a lot of risk in accounts like 401k’s & IRA’s.  They know these buckets are long term accounts and are willing to take risk in them, looking for long term capital appreciation.  Given the growth of their business they are less likely to need to dip into these accounts anymore.

Secondly, the majority of the rest of their money is invested very conservatively.  They still remember how hard it was to get where they are, how much risk they took, how scary things were when there bank account was at $0.  So, they focus on putting a good chunk of their money into low risk or even guaranteed investments.

I find they do this for two reasons, first, they want to have an emergency backup if something should happen with their business.  And secondly, they don’t need to take that much risk with their money since the bulk of their assets is still in their business, a risky & illiquid asset, which is growing very fast.  Thus they are able to balance things out with this strategy.

Take Action

Now that you have a basic understanding of how you may want to balance your investments, it is time to take action.  Take an hour out of your day to do some due diligence on your current situation and then map out a plan moving forward.  If you don’t have the time or expertise, find someone you trust and have them help you determine what the best strategy is for your situation.  Once you have done this, then implement it and monitor it moving forward.

Thank you for taking the time to read this, I appreciate it!  T

Cheers,

Derek Notman