Saturday, April 13, 2013

2 Huge Reasons to Build an Investment Portfolio outside Your Business

It made my day in a recent Chief Executive Boards International meeting when a younger member said, "I'd like to know a lot more about investing outside my business."   I could have hugged the guy.  He's on exactly the right track, and has decades to apply that knowledge to growing his own wealth. 

I'm greatly concerned about how few business owners (CEBI members included) have most of their net worth tied up in their businesses and almost no wealth accumulated in their own portfolios. 

There are 2 huge problems with that:    
  • Risk -- Business owners as a group are unrealistic about the risks their companies face - particularly in the case of circumstances beyond their control.   Your company is only one stroke, one heartbeat, one employee harassment suit or one product liability lawsuit away from extinction. These are just a few of the events that have wiped out the value of closely-held companies.   In most companies, if the owner is suddenly and irrevocably out of the picture, the value of the company plummets, leaving the caregivers or heirs dependent entirely on assets accumulated outside the business.

    No sane investor would put all his money in a single publicly-traded company's stock.  It's just as risky to have all your assets tied up in your own company's stock.  

    As a CPA friend of mine is fond of saying, "You set up a Corporation for a reason - to protect your assets and your family from bad things that might happen in or to your business.  Why don't you use that protection, by getting some assets outside that corporate veil?"  
  • Retirement -- By the time you're ready to leave your business, say, sometime in your 60's, you'll probably have another 25-30 years of life expectancy.  Robert Kiosaki's book, Cash Flow Quadrant makes a good point.  No matter how you've earned money during your work life -- whether as an Employee, a Self Employed person or a Business Owner, financial freedom is the domain of the Investor -- the quadrant where you don't have to work at all -- your money works for you.
    Now, think of how much time, study, practice and experience you've put into earning money through work. Realizing that by the time you're 60-70 years old you'll still need income for the next 20 or 30 years, what's your plan? It has to be income from successful investing, doesn't it? That's potentially 1/3 of your life. If it was worth all that time learning to earn it, isn't it worth some time learning to invest it?
So, it was really refreshing to hear a 30-something business owner talking about learning how to invest in other businesses, such as the stocks of major corporations, usually through mutual funds or exchange traded funds.  He has 30 years to learn how to do that, while he's continuing to learn how his business can provide more cash flow to fund that portfolio.   

My suggestion to him was an extraordinary resource I discovered a couple of years ago -- Money Magazine. This is one of the few real "how-to" laymen's guides to personal investing. Nothing flashy -- no hedge funds, derivatives, complicated or exotic strategies. Just simple, bread-and-butter saving and investing strategies that work and have worked (despite headlines to the contrary) for decades. Try it -- risk $15 on a year on this resource:

Perhaps your investment acumen is far above this "retail investor" guide. Consider giving your kids a subscription instead. You never know, they might read it and start saving and investing for their future retirement early -- the key to success in accumulating net worth.

And, finally, once you start accumulating substantial assets outside your company, find a fee-only investment advisor -- someone who doesn't sell any products or take any commissions -- who can help you make informed decisions about where and how to invest your portfolio.  
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Terry Weaver

Chief Executive Boards International

Chief Executive Boards International: Freedom for business owners & CEOs -- Less Work, More Money, More Freedom to enjoy it 


  1. Hi Terry -
    I'm a 54 year old business owner who has owned / operated my company for 28 years.

    About 15 years ago I attended a "How to successfully sell your business" seminar sponsored by a business broker. I had no intention of selling, but wanted to start learning / setting the stage for the future.

    That day changed my life - for the better. I only remember one thing about that day. The broker asked the room of about 30 people representing 20 businesses (there were some husband / wife teams present) a single question: "How many of you in this room have over 80% of your personal net worth tied up in your business?" Every hand was raised, including mine.

    Now I was the youngest in the room by at least 15 years and was shocked by the response. And that day I made a promise to myself that I wanted / needed actually / to have my business % of my personal net worth represent 10% and not 85%. It took me about 12 years to reach this goal, mostly through regular quarterly distributions of profits coinciding with estimated payments (We are an Scorp).

    And then I said, "If I'm at 10%, why can't I be at 5%"... and 3 years later that is where I sit today. The majority of my investments are stocks, bonds, 401k, cash, whole life insurance (purchased when I was in my 30's), real estate (commercial and apartment complexes) and some private equity. I use a fee only financial advisor and concur with your recommendation.

    The biggest risk you have in owning a small business is thinking you have all the answers. While none of my investments outside my company have the same ROI, I believe that diversification of risk via asset class allocation is critical long term. Align yourself with intelligent advisors, get a game plan and then trudge along, day, night, sunshine and storms.

    1. Wow, you absolutely get it! Moreover, you've planned and executed accordingly. Any wildly unbalanced portfolio is risky - particularly if you're overweighted in an investment that's largely dependent on the success, judgement and health of one person (usually the case in a small business). Business owners in general discount the huge risks beyond their control that could crush their companies.

      You also identified the blind side of many business owners - thinking you have all the answers. That's where groups like Chief Executive Boards International pay off. I've seen business owners become far more objective about their businesses, assisted by the impartial perspectives of others.


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