{"id":4400,"date":"2017-05-01T05:18:41","date_gmt":"2017-05-01T12:18:41","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=4400"},"modified":"2017-03-31T10:14:30","modified_gmt":"2017-03-31T17:14:30","slug":"asset-allocation-for-small-business-owners-e","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/asset-allocation-for-small-business-owners-e\/","title":{"rendered":"Asset Allocation for Small Business Owners and Entrepreneurs"},"content":{"rendered":"

\"Picture<\/a>In an online forum the other day, a long-time member advised someone to ignore their small business when considering their asset allocation. No one seemed to take much notice. And the group discussion soon moved on to their usual arguments.<\/p>\n

But the question got me thinking: Shouldn\u2019t asset allocation for small business owners and entrepreneurs consider their ownership interests in their businesses?<\/p>\n

I think so. In fact, I\u2019d like to propose a more nuanced approach to asset allocation for small business owners and entrepreneurs. Because here\u2019s how the landscape looks to me\u2026<\/p>\n

Idea #1: Standard Asset Allocation Formula Your Starting Point<\/h2>\n

Okay, first thought: I think we should all still start out with\u00a0a standard asset allocation formula for all of our traditional asset class investments.<\/p>\n

In other words, for the stuff other than the investments we\u2019ve made in our small businesses, we try to apply a standard formula.<\/p>\n

If you\u2019re using a 60% stocks and 40% bonds asset allocation formula, for example, you go with that as best you can for the money you\u2019re holding in your retirement accounts and taxable brokerage accounts.<\/p>\n

Idea #2: Let Alternative Asset Classes Nudge Percentages<\/h2>\n

But another thought\u2014maybe we should let any alternative investments nudge or tilt the percentages.<\/p>\n

Let\u2019s say, for example, that your standard asset allocation formula says you should have 15% allocated to real estate investment trusts. (One popular asset allocation, David Swensen\u2019s<\/a>, suggests this.)<\/p>\n

Further suppose that as part of your small business or entrepreneurial activities you have 5% of your investments in direct real estate.<\/p>\n

While it doesn\u2019t seem logical that you would consider the 5% direct real estate investment as a complete<\/em> replacement for 5% of real estate investment holdings, you probably don\u2019t need as much real estate in your traditional assets portfolio if you\u2019ve got a bunch in your alternative assets portfolio.<\/p>\n

You\u2019re probably holding real estate investment trusts as an inflation hedge, right? And you should get some inflation hedging from direct real estate investment.<\/p>\n

In the end, then, while maybe your standard asset allocation formula says<\/em> 15% to REITs, you might be okay going with\u00a013% or 12%.<\/p>\n

You don\u2019t give yourself \u201cfull credit\u201d for direct real estate investment. But you give yourself some credit.<\/p>\n

Let me give you another example, too. Say your standard asset allocation formula says you should have 30% allocated to US stocks and that your small business amounts to 10% of your investment portfolio. Again while it doesn’t seem right to consider that 10% in your own business as a substitute for 10% of the US stocks allocation, maybe you nudge down that 30% value to 25%.<\/p>\n

Probably you’re holding US stocks to share in the investment profits that flow from a healthy, growing US economy.\u00a0\u00a0But if you’ve got 10% of your investments in a small business you own–a high-risk but also high-reward private equity investment–probably you’re already going to profit\u00a0from a healthy growing US economy via that allocation.<\/p>\n

Idea #3: Try to Uncorrelate Alternative Asset Investments<\/h2>\n

A third notion to consider\u2026<\/p>\n

One of the things going on in any good asset allocation formula is that you build a portfolio using different asset classes so if returns in one class zig, that\u2019s okay because returns in another asset class zag. The returns from different asset classes are uncorrelated, in other words.<\/p>\n

With private, entrepreneurial investments, you can\u2019t always\u00a0widely\u00a0diversify. But you should sometimes be able to invest in things that aren\u2019t as correlated.\u00a0And that\u2019s probably a good idea.<\/p>\n

For example, say your alternative assets portfolio includes two investments: $200,000 of equity in a small business and $200,000 of equity in direct real estate ownership. If the real estate you own houses your business, that\u2019s pretty correlated. And that\u2019s not good asset allocation.<\/p>\n

On the other hand if you have $200,000 of equity in a business in your home town and then $200,000 of equity in real estate located in another town or another state, that\u2019s quite a bit more diversified.<\/p>\n

Idea #4: Over Time Move Toward Your Ideal<\/h2>\n

A final quick thought. Small business owners and entrepreneurs will often over time tend to liquidate their alternative asset class investments like the business they own and the rental properties they hold. Probably you will too.<\/p>\n

And what I think this means is that as liquidation events occur, you want to redeploy alternative asset sale proceeds to traditional asset classes using your standard asset allocation.<\/p>\n

For example, if you liquidate some alternative asset for cash, you use those proceeds to make traditional asset investments and in a manner that moves your asset allocation to whatever you\u2019ve already decided is appropriate. If you\u2019re using a 60% stocks and 40% bonds allocation, for example, you might use proceeds to invest 60% in stocks and 40% in bonds.<\/p>\n

As another example, if you liquidate some alternative asset for cash and an installment note, you consider the installment note to be like a bond (which is it) and then use the cash for whatever else you invest in other than bonds (probably stocks).<\/p>\n

Related Posts You Might Find Interesting<\/h2>\n

Active Investor Tips for Entrepreneurs<\/a><\/p>\n

Index Funds and Asset Allocation Even Better for the Wealthy?<\/a><\/p>\n

Applying the Logic of Asset Allocation to Your Small Business<\/a><\/p>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

In an online forum the other day, a long-time member advised someone to ignore their small business when considering their asset allocation. No one seemed to take much notice. And the group discussion soon moved on to their usual arguments. But the question got me thinking: Shouldn\u2019t asset allocation for small business owners and entrepreneurs […]<\/p>\n","protected":false},"author":1,"featured_media":4402,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[12,10,20],"tags":[30],"class_list":{"0":"post-4400","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-management","8":"category-personal-finance","9":"category-retirement","10":"tag-asset-allocation","11":"entry"},"yoast_head":"\nAsset Allocation for Small Business Owners and Entrepreneurs<\/title>\n<meta name=\"description\" content=\"Asset allocation for small business owners and entrepreneurs gets 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