As a career entrepreneur--I've launched or invested in more than 10 companies--I know how vital confidence is. I have yet to hear a Silicon Valley start-up founder confess to a lack of belief in his or her own company or skill set. But as someone now in the business of helping individuals manage their portfolios and build their net worth, I can tell you the confidence that propels your entrepreneurial drive can create problems in managing your investments.
Yes, you're smart. Really smart. Smart enough to get into serious trouble as an investor.
Successful entrepreneurs often assume that their portfolio returns will be at least as good as the market averages--which are, after all, average. If only. Study after study shows that individual investors do worse than the markets. And in my experience, entrepreneurs' returns don't look markedly different from those of the average investor.
The problem is that your confidence in your abilities and your business can spill over into your investing habits. Emotions push you to do the wrong thing at the wrong time.
Now, you might know someone who followed his gut and bet everything on a risky company and thrived. In fact, you might have read about that person in this magazine.
But the story of the genius gambler is less common than the sad tale of another person I am thinking of, a poor soul who exercised a bunch of stock options when his Internet company was flying high, then held on to his shares to get long-term capital-gains-tax treatment on future gains. When the bubble burst, he was left with near-worthless shares--and a wicked tax bill from the exercise of those options.
When the markets are tanking, emotions tell you to sell. Flee the danger! When markets are rising, the emotional tug is to jump on the bandwagon. Case in point: A lot of people I know in Silicon Valley swore off stocks after the financial crisis. They kept their heads down; they moved their money into cash. And now that stocks have essentially doubled in value, these people want to jump back in. That's exactly wrong.
It doesn't help that as an entrepreneur, you're trained to focus on the here and now. Long term is next year. Believe me, I get it. But that short-term mindset makes for a lousy investor who chases hot trends in rising markets and bails in bad ones.
My recommendation is to stop thinking like an entrepreneur when it comes to your investment portfolio. Develop a long-term diversified investment plan and stick with it.
Start by ignoring the standard advice for how much you should have invested in stocks at any given age. Your household finances are already packing plenty of risk--your business. You need to balance that out, which probably means investing less in stocks than a friend who works for a Fortune 500 company. And keep those investments balanced as your risk picture changes.
I haven't always followed my own advice, but now my portfolio looks like a barbell, with most of its weight on the ends of the risk spectrum. A significant chunk of my net worth is invested in start-ups, so I have much of the rest invested conservatively: in cash, short-term bonds, and real estate without mortgages. I am confident that's the smartest way to manage the risk of being an entrepreneur.