Investing for Small Business Owners
As an investment professional specializing in managing investments for entrepreneurs and small business owners (SBOs) I am repeatedly confronted with several investing issues that specifically deal with these individuals. Because of their unique situation, several of these issues go overlooked by the business owners.
Too Much Risk
Entrepreneurs by definition like to take risks. This type-A behavior often spills over into their investment portfolios. The first mistake often made by the SBO or their advisor is they don’t consider the business as a piece of the portfolio. This is critical because the business is often the most precarious component of the portfolio.
Small businesses are heavily influenced by economic cycles, competition, and raw material inflation. The small business owner must look at their investment portfolio less as a growth vehicle and more as a vehicle for capital accumulation and preservation. By doing so the SBO has the option of using their portfolio for income generation during tough economic times. If the portfolio is only structured for growth they are very likely to lose a large portion of their net worth during poor economic times (as the stock market leads the economy by 6-12 months).
This brings me to the second reason SBOs assume too much risk. Many small business owners like to invest in the same industry as their business. At first glance this seems logical, as one can make a more informed decision regarding an investment decision if you know the industry. But once you start to include the business as a piece of portfolio you soon realize you are overweighed in that sector or industry. If their industry goes into a negative economic cycle the result is a drastic drop in the SBO’s net worth and available liquid assets. Investing in the same industry only compounds the problem. Instead SBOs should look to invest in counter cyclical industries as a component of their portfolio. Therefore during times of economic contraction in their sector their portfolio will be protected by growth in those inversely correlated investments.
Hold & Hope
Wall Street, just like Pavlov, has mastered the art of classically conditioning their subjects. In just about every advertisement you will see the worn mantra “buy and hold for the long-term” or “stocks always go up long-term”. But stocks always go up long-term right? This all depends on YOUR definition of long-term. As an example, the S&P-500 peaked in 1969. In 1982 the S&P-500 was at the same price! Can you afford 13 years of no investment gains in your portfolio?
The truth is that stocks (or bonds for that matter) are not always good investments. Just ask Warren Buffett; He’s holding over $40 Billion in cash because bargains are scarce. It all boils down to this: Wall Street can never be negative on stocks; if they were, they would have nothing to sell to the public.
Instead of buy and hold small business owners need to manage their investments just like their business: proactively.
Interested in getting RESULTS? Talisker Investment Group specializes in delivering results, regardless of market conditions. Contact Talisker at (208) 860-4244 or www.taliskergroup.com to open a managed account today.
Daniel Wiggins is the Chief Investment Officer for Talisker Investment Group, LLC. He is nationally recognized as a leading expert in proactive investment management, specializing in "absolute returns".
Talisker Investment Group, LLC is an Idaho based Registered Investment Advisory. Talisker specializes in proactively managing investments for small business owners, individual investors, and corporate executives. In addition to successfully managing investments, Talisker advises several institutional clients based in London, Boston, Chicago, and Ketchum.
Contact Talisker Investment Group at (208) 860-4244 or www.taliskergroup.com.
©2005 Talisker Investment Group, LLC.
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