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How Business Owners Should Invest Differently

Often, business owners get too comfortable with their unique and more concentrated risks, but they especially need a diversified portfolio that can temper vulnerabilities. (opens in new tab) (opens in new tab) (opens in new tab) Newsletter sign up Newsletter (Image credit: Getty Images) By Justin Goodbread, CFP®, CEPA, CVGA published 30 October 2022 As a business owner, you often face a very different set of financial risks than your non-business-owning counterparts. When it comes to investing, there are two major considerations you'll need to remember. First, keep your powder dry. This is an old seaman's term that I like to use when describing the need to keep enough cash in your personal and business finances to weather life's storms.

Why You Need to Be Diversified to Protect Your Portfolio The other consideration is that you likely have heavy concentration risk. In other words, most of your net worth is tied up in your business. For the purposes of this article, let's assume that you have enough dry powder. Let's also assume you're like the majority of business owners and you're dealing with significant concentration risk. With these things in mind, we want to answer the question, "Why do business owners need to invest differently?"

A Huge Red Flag

Well, if I were to look at a client's portfolio and see that they have 70% or 80% of their funds invested in a single business, that would raise a huge red flag. That tells me this client is open to an enormous risk should that holding suddenly decrease in value. Yet this is exactly what is happening with business owners all over the world.

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Profit and prosper with the best of Kiplinger's expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail. Profit and prosper with the best of Kiplinger's expert advice - straight to your e-mail. Sign up Additionally, business owners are so used to dealing with risk that they often become too comfortable with it. Of course, no two situations are exactly alike, and we all have unique perspectives and biases. However, knowing that business owners are particularly prone to concentration risk in their daily lives means we must take special care in helping to assemble an investment portfolio that mitigates that risk and enables you to diversify away from your business. This is why you need a trusted adviser who can help keep you grounded. Now, the basic nuts and bolts of investing will likely remain the same. You still need to know where you're starting from (your current net worth), risk tolerance and capacity, and where you want to go, financially speaking. That's probably not going to change. But each of these important pieces will help your adviser assemble a portfolio that can withstand drawdowns and mitigate risk through diversification, helping you, ultimately, to reach your financial goals.

An Example of How Easily Concentrated Risk Can Happen

However, investing as a business owner is not exactly like investing as the average worker, and it's vital that your adviser realizes this. A great example of why this is so important comes from someone I met many years ago. This individual was a business owner whose company made widgets for the U.S. military. When they first came to me, they had been working with an adviser who had placed their entire portfolio into defense stocks. Despite their attempt to diversify and remove their concentration risk, they were even more concentrated. This person was receiving funds through their business via defense contracts while investing in defense equities. After my initial meeting with this individual, I began to understand the importance of entrepreneurs working with advisers who truly understand the specific situations of their business owner clients.

The Best Rewards Credit Cards for Small Businesses in 2022 You see, as a business owner, you confront a unique set of characteristics that, from an investment perspective and portfolio construction and design perspective, you and your advisers must be mindful of. For example, your business will typically have fewer constraints on it than you would find in the investment world. Oftentimes, you're using leverage in your business. You're involved in the business. These things provide opportunities that are much rarer when investing in stocks. Primarily, this is because the investment side of things is much more constrained. That's where strategies such as hedge funds can help.

How Hedge Funds Could Help

Although people often think of hedge funds as asset classes, they're actually strategies that provide investors with exposure to sources of return. In this regard, they can help to remove some of the normal constraints that come with investing. In many ways, your business is like a miniature private equity fund or hedge fund. So, there are alternative strategies such as these that many business owners might find attractive.

3 Top Challenges Female Entrepreneurs Face When Starting a Small Business Still, you must remember that the only correct strategy is one that is appropriate for your highly unique circumstances. Then, once you've selected the appropriate strategies, you must work with your adviser to determine the best way to combine them to achieve the characteristics you're seeking. Therefore, investing does indeed look a little different for business owners, and it's important to work with an adviser who understands this. This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC (opens in new tab) or with FINRA (opens in new tab). Explore More Building Wealth Justin Goodbread, CFP®, CEPA, CVGAChief Strategy Officer, WealthSource PartnersJustin A. Goodbread is a CERTIFIED FINANCIAL PLANNER™ practitioner and an adviser with WealthSource® Knoxville. After years of working in a large firm, he ventured out on his own in 2009, starting Heritage Investors, and eventually joining WealthSource® Partners LLC in 2022. As a serial small-business owner, Goodbread has bought and sold multiple businesses. He uses this experience, along with his continuing education, to help business owners grow and sell what is often their largest asset. Latest 4 Ways You Can Take Advantage of a Down Market With markets down for the year, it may seem that all the news is bad. But now could be a good time to make some profitable moves. By Adam Grealish • Published 11 November 22 New, Used or Leased: Is Now the Time to Buy an Electric Vehicle? The Inflation Reduction Act created new tax breaks for electric vehicles. Here's a guide to which EVs count and the best time to buy. By Rivan V. Stinson • Published 11 November 22 You might also like 4 Ways You Can Take Advantage of a Down Market With markets down for the year, it may seem that all the news is bad. But now could be a good time to make some profitable moves. By Adam Grealish • Published 11 November 22 Finding Peace of Mind With Your Retirement Income Even in tough times, you can secure retirement income that lets you maintain your lifestyle, lasts a lifetime, adjusts for life events and leaves a legacy for the kids. By Jerry Golden, Investment Adviser Representative • Published 10 November 22 What to Do When an Unhappy Customer Threatens to Ruin Your Rep Some customers go too far when they feel they haven't been treated well, demanding unreasonable make-goods and even resorting to extortion. An attorney offers some advice. By H. Dennis Beaver, Esq. • Published 10 November 22 Rising Interest Rates Change the Math on Pensions for Some Would-Be Retirees Now is a good time to think about when and if to take a lump sum on your pension and what to do with it. Let's explore the pros and cons. By Michael Aloi, CFP® • Published 9 November 22 Counterattack: Tips for Thwarting a Will Contest From contentious relatives to scam artists, wills are not immune to the threat of a contest. If you have an inkling such a fight could be in your estate's future, here are some ways to limit the risk. By Linda Kotis, Esq. • Last updated 10 November 22 5 Steps to a Stronger Financial Plan It's impossible to be right all the time, but a strong plan and constantly assessing where you are can help you pivot when bad things inevitably happen. By Eric Roberge, Certified Financial Planner (CFP) and Investment Adviser • Published 8 November 22 Safe Harbor 401(k)s Can Help Small-Business Owners Keep Happy Employees Immediate vesting and contributions by the employer regardless of the employee's participation pump up workers. Employers get lower costs and tax benefits. By Mike Piershale, ChFC • Published 8 November 22 5 Survival Tips for the Bear Market It's been a painful year for investors, but focusing on the long term and implementing constructive actions can help weather the turbulence. By Daniel Kern, CFA®, CFP® • Last updated 8 November 22 View More ▸ kiplinger About Us (opens in new tab) Terms and Conditions (opens in new tab) Privacy Policy (opens in new tab) Cookie Policy (opens in new tab) Kiplinger is part of Future plc, an international media group and leading digital publisher. Visit our corporate site.
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