4 Money Mistakes That Entrepreneurs Must Avoid
You've heard the advice before: Diversify, make time work for you, and embrace stocks. For most folks, those are the core pillars of any investment strategy. For business owners, that's true only up to a point. You are different and need to invest accordingly.
That assumes, ahem, that you're investing at all--and haven't fallen for the old misconception that your company is the only investment you will ever need. Says Jeffrey Levine of Alkon & Levine, a Newton, Massachusetts, accounting firm specializing in small business: "I want entrepreneurs to know that the odds that their company will become a huge success--enough to meet all their financial needs through retirement--are against them.
So it's important to put something aside on a regular basis." In other words: Build your company as if it will last forever, but invest your personal wealth as if everything will collapse tomorrow. We talked with experts such as Levine and Allan Roth, of Wealth Logic, an investment-advisory firm in Colorado Springs, Colorado, about the other mistakes business owners make.
Here are some ways not to be your own financial enemy.
1. Be a conservative. You already believe that you aren't like regular wage earners--and when it comes to investing, you're not. Your salaried peers, even at the same age, are going to be more aggressive in their investments. "There is no single magic metric for entrepreneurs," Roth says. "Adages like 'Subtract your age from 100 and that's the percentage of your portfolio that should be in stocks' just don't apply. It's highly situational."
That said, Roth suggests that entrepreneurs who have substantial assets invested in their companies should favor more conservative options. Moshe Milevsky, author of Are You a Stock or a Bond?, says launching a company is like investing in an über-growth stock: When it comes to your portfolio, you should be a little more bond-centric as a hedge against your risky line of business.
2. Save something. Please. It's almost a cliche in the small-business community: You take every last dime in your pocket or every last dime from your friends and family and plunk it right into your business until death do you part. But as you can see from the chart (right), the return on that investment is far from a sure thing. Simply put, sinking your every last cent into your company isn't a good idea.
In fact, treating your business as your sole investment is the ultimate "antidiversification" strategy. Says Levine: "To me, it always makes sense to save for a rainy day...build your business and your portfolio."
3. Startups have their own tax privileges. Especially in the startup years, you may have tax-savings options that employees don't. Here's one sometimes overlooked move that has helped owners who are booking losses. Wealth Logic's Roth suggests a Roth IRA conversion strategy. Normally, when converting from a traditional IRA to a Roth IRA (no relation), investors pay tax. But an owner suffering a loss can often make the conversion tax free--by offsetting losses from the business against income from the conversion. Bottom line: You move tax-deferred IRA funds to a tax-free Roth IRA without paying taxes, or by paying only a low marginal rate.
4. Don't fall in love with your own expertise. "One common mistake that entrepreneurs make when investing," says Roth, "is to invest too heavily in the industry that their business is in. They feel that because they know that sector so well, they stand a better chance of success." Far from guaranteed.
Sure, you might get lucky, and your sector could leave the S&P in the dust. But keep in mind that such outperformance can also reverse. Remember those banks a few short years ago or tech in 2000?
Scott Leibs is executive editor of Inc. magazine, where he oversees the Lead and Build sections while also handling a range of other writing and editing duties for the magazine, website, and custom publishing projects. He is a former editor in chief of CFO magazine and a former senior editor for InformationWeek, and has written for many other publications, including The Economist and the San Diego Union-Tribune. He is a graduate of Emerson College, Boston University, and the University of Massachusetts.