For business owners, investing outside of their business can be challenging. Let’s face it, a successful business owner has much more understanding and control of their business than a diversified investment and insurance portfolio. However, while it is true we know what we know, it is also true that we don’t know what we don’t know. And, it is not knowing that can bring risk, lack of choices and lack of control.
Einstein and I agree on many things. One thing we agree on is that, “Everything should be made as simple as possible, but not simpler.” So, let me try to simplify: When it comes to selling your business, you as a business owner can’t predict the future as well as you think when it comes to when you are going to sell your business, who you are going to sell your business to and for how much. Moreover, without a mathematically and scientifically based financial model you won’t have any certainty that you and your spouse will have enough money to live as well as you want, for as long as you want.
As John Brown, succession planning attorney, states in his book Exit Planning: The Definitive Guide, “The most common mistake owners make in thinking about their future exits is that they assume that when they are ready to go, their business will be ready for them to go as well.”
One of the answers is to diversify.
Aesop reminds us that diversifying means not putting all of your eggs in one basket. You know this because you are doing it in your business. Does your business rely on one product or service? Do you only have one or two clients? Of course not. All successful businesses diversify their product offerings as well as do their best at having a diverse customer base. So just apply this type of Simple Scientific Strategic Thinking to your investment and insurance portfolio.
In investment parlance we often use the term “asset allocation.” Asset allocation is a systematic approach to diversification that may help you determine the most efficient mix of assets (business, business real estate, intellectual property, stocks, bonds, commodities, currency, collectibles, cash, annuity, permanent insurance, etc.) based on your risk tolerance for losses and time horizon for staying invested before you start withdrawing and spending down your assets.
Each asset class has a different level of liquidity, income potential, volatility, risk and possible return (LIVRR). At any given time, one asset category may be increasing in value, while another may be decreasing in value. Diversification is a method to help manage investment risk. Asset allocation and diversification do not guarantee a profit or protect against loss. So if the value of one asset class or security drops, the other asset classes or securities may (or may not) help cushion the blow.
Dividing your investments in this way may help you ride out market fluctuations and protect your portfolio from a major loss in any one asset class. Of course, it is also important to understand the risk versus return tradeoff. Generally, the greater the potential return of an investment, the greater the risk. Moreover, the more risk the less liquidity because most investors don’t want to sell an asset when it is down.
When you are considering how to diversify your portfolio, ask yourself what you want to accomplish and when. Are you planning to expand your product offering? Are you planning to merge or acquire a new company? Are you planning to borrow more money? Are you planning to buy new equipment? Personally, are you planning to buy a second home? Do you aspire to pay for your children’s or grandchildren’s college education? When retirement rolls around, would you like to travel or have an expensive hobby? These factors should all be considered when outlining an asset allocation strategy.
Whichever asset allocation scenario you decide on, it’s important to remember that there is no one strategy that fits every type of investor. Your specific situation calls for a specific approach with which you are comfortable and one that could help you pursue your investment goals. Consider creating a “Dream Team” comprised of investment advisors, a retirement coach, transaction attorney, estate planning attorney, CFO and accountant as a start. Most importantly, allow them to have open, honest, professional dialogue with you.
While your business is your most important financial investment it shouldn’t be the only element of your financial future. Use the same tools, techniques and strategies to build a Simple Scientific Strategic Plan outside of your business. So, when that day comes for you to retire, you have a diversified asset allocation that provides you with options, opportunity and time.