Reminder to business owners: Risk plays differently in your personal portfolio
By David Haggard, CFA®, CFP
Business owners are an admirable bunch. They have a strong nerve and high tolerance for stress. They persevere through the hard times with an inner confidence to keep going. They’re problem solvers.
These personality traits are a blessing when it comes to running a business, yet a curse when it comes to personal investments.
As an entrepreneur, you must tolerate an immense amount of risk in your business. You’ve worked hard to build a successful business, witnessing large returns on your business from the fruits of your own labor.
Generally, business owners take too much risk in their investment accounts. It’s unwise to take the same level of risk with your retirement fund as you do operating your business.
Here are ideas to avoid transferring that same risk-taking mindset and expectation of a high return to your investment portfolio.
Tone down the risk of your portfolio. Your child’s education account, your retirement fund and your other personal investments should be stable no matter what happens to your business. If you have a high-risk mindset when it comes to your investment portfolio, then both your business and your investments could be affected by a downturn in the economy which can last for years.
Keep some investment accounts off limits. Never raid your retirement account. When there is a dip in your business revenue, use your savings account for business expenditures. Even when the economy is booming and your business is thriving, some accounts must be protected. No one could have predicted COVID-19. Risk is not going to be kind to you when it shows up out of nowhere. You do not want to lose your business and your retirement fund.
Understand your level of control. Your single business has more risk exposure than a portfolio of 50 publicly traded companies. Being in control of your business makes it feel like there is less risk. Entrepreneurs are generally hardworking and creative people who will do everything in their power to keep their businesses going. But you can’t control everything. Acknowledge the risk your business is exposed to and manage your personal investment risk exposure accordingly.
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