Entrepreneurs who grow their wealth

Last week, I was speaking with an entrepreneur who is ploughing all their wealth back into their business. He told me, “I know my business well, Jacoline, and I understand it. Yeah, it's concentrated risk but that is the best risk management for my money.’

It is a familiar conversation. Typically, business owners invest any extra money into their business. They assume the risk of such a concentrated bet is not their issue as they know the industry so well. Unfortunately, the statistics do not support this “sell the business for a lot and retire” wealth plan. The data supporting the odds of making a retirement income from your business are low.

As a business owner, having Plan B for your retirement is like having a very good insurance policy. You will be glad to have it. In the meantime, go crazy with your business. Except now, you will not be driving your spouse crazy too with worry about money. You may also get the life balance you know you need.

There are Olympic athletes who win gold medals. We would not think about competing in the Olympics against those who have practiced every day. It is the same with finance. - Ray Dalio

1.Do you truly understand how the drivers for success are different?

Recognize that your machine to make the money, your business, is very different from the machine that invests your money. Being an entrepreneur means you can place a dollar into your business and see it grow. When you invest, it is a different skill set altogether. It is time based. It takes care. It also takes extensive skills. The systems and technologies are built and run over decades. There are Olympic athletes who win gold medals. We would not think about competing in the Olympics against those who have practiced every day and are experts. It is the same with finance. Stock picking and having investments recorded on your excel spreadsheet, scattered across companies and different providers will in the end, not win the day against the experts.

2. Do you have monthly payments to invest into your portfolio?

Set up scheduled investment payments. We have heard about “Pay yourself first” and putting aside money. Yes, by all means, work as if you are building a winner of a company, but invest for your personal wealth as if the crash of the economy will return and your business is wiped out. Have your bank take out a set amount to put into your portfolio every month. I am shocked by how many wealthy looking entrepreneurs with all the toys are, in fact, not investing into a portfolio. Your spouse will be grateful to see a nest egg outside of your business. This will affect your personal relationships.

3. Do you know how to be low risk in your long term investing?

You already know you are different to those investors with salaries. You have high risk by concentrating most of your wealth into one stock – your business. Avoid those Angel investment clubs and private investments into that storage unit business by the highway run by Harry. They tend to not turn out and your business is high risk enough. In fact, building wealth with your hard earned money should not be exciting. As Warren Buffet said, “Beware the investment activity that produces applause; the great moves are usually greeted by yawns."

4. Are you seeking Alpha?

Entrepreneurs, when they first start investing seriously, they want the top return. over 20% or it's not worthwhile. Their businesses often have given them significant growth and they bring these expectations to wealth management. Recognize the risk you are taking. Investment asset classes play different roles in your portfolio.

Beware the investment activity that produces applause; the great moves are usually greeted by yawns - Warren Buffet

5. Are all your eggs in one basket?

Doing your own business is gratifying but it is high risk. The opportunity cost of forgoing a regular salary and pension contributions, add up to a large opportunity cost. After many years, you may have worked but have little to show for it. By putting all your cash into your business and nothing for retirement, you are doing the number one risk activity – concentrating all of your wealth into one investment. You would not put all your chips on one bet in the casino. Why would you do that with your wealth?

6. Are you able to be humble?

You have been the smartest person in the room. It is difficult to believe that paying a financial expert, who is sensitive to your interests, to manage your money could do as good a job as you. Be humble about your financial planning. You are able to build and run a business which is a tremendous achievement. When entrepreneurs shift from the money-making machine to the wealth machine, they want to get the returns and the excitement. Good wealth management is about dialing back the risk. You have spent your life making this wealth, why would you imperil it? Get yourself a good expert to work with you, not for you, and your retirement years will be happy.

The advice for building wealth is simple: diversify, let time work for you and invest in stocks. Yet for business owners, investment advice needs to get past their biases.

If you would like to speak with me more about some of these issues, I welcome your call or email.

416-345-7012 [email protected] Twitter: @jacolineloewen