Run Your Investments Like a Quality Business

Many of us daydream about starting a side business. Maybe you already have one!

Are you the CEO of an investment firm? If you’re a BetterInvesting member (or fan) and you invest regularly, the answer is yes. But too often, we think of our investments as something we plunk money into, make some choices regarding funds or individual investments, then hope for the best. Instead, let’s think about using the techniques of a well-run business to grow our own “company.”

Have a Business Plan

Take any small business development seminar and you’ll be required to write a business plan. Depending on complexity, these plans can stretch through volumes, but you can find many one-page templates as well. Business plans serve two pur­poses: to help you think through the aims, costs and timelines of an idea (and poke holes in parts that aren’t viable) and serve as an advertising document to attract financing and investors.

You’re probably not looking for a startup loan, but many people need to convince a spouse or adult kids or a financial planner who would benefit from understanding your methods, reasons and goals. The plan helps define the objectives of your investing. Are you aiming for early retirement or youthful independence? Are you venturing into recovery from previous reverses or under-capitalization (i.e., you haven’t yet saved enough)?

“Saving as much money as I can, buying the best investments and getting as rich as possible” is a dream, but it’s not a plan. In order to feel successful, you need goals that are measurable and on a timeline.

For example, “Savings will be $20,000 per year. The return goal is 6% annualized over five years. In three years, five years, 10 years, the portfolio will be worth (target amount).”

What return or income will you need? A nice side business might generate $500 or $1,000 a month (may-be $300,000 invested), but that won’t support you full time. Set what the business must generate in order to produce desired income, pay taxes and beat inflation.

Management Team

You might think you have a management team of one — yourself — but that probably shouldn’t be the case. You may have a partner or spouse, perhaps an adult child, who might have an interest in the investment firm. Will they have voting rights or merely serve as consultants? Will you have rules, such as strong opposition triggers a reevaluation?

Do you have a financial planner or accountant? As CEO you’ll manage the bulk of the business, but savvy business owners seek and employ professional help.

Will you have virtual assistants — software designed to assist in decision making? Stock selection tools from BetterInvesting, Morningstar and perhaps Value Line can provide valuable “consultant” input.  (And may be available for free from your local library!)

Investment clubs can serve similarly to a board of directors. Most clubs are only too happy to have a member deep-dive into a stock. But even if your plan includes mutual funds, you’ll need to review the asset class and sector of any individual stock which can provide guidance for your portfolio decisions.

Adequate Startup Capital

Many new businesses fail because they’re under-capitalized. A business with $3,000 in startup capital probably wouldn’t choose to open a factory or hire 20 employees.

People get excited about investing and want to jump in to pick some “hot” stocks before they have an adequate emergency fund. Consequently, when an emergency arises, they’re forced to sell off the “company’s” assets at any price in order to raise capital.

Many mutual funds require an initial purchase of $3,000. You can get around this by buying exchange-traded funds or individual stocks for even small amounts, plus trading costs, if any. Just be mindful that you’re driving up your business’ cost to purchase. A better choice early on might be to purchase one pool that sufficiently diversifies you, while you educate your-self about possible “product lines.”

Multiple Product Lines

Prudent businesses establish multiple streams of income. What divisions will you have? A safe but boring bedrock of a bond line? A venturesome division of individual stocks? Some real estate — ­your home, income properties, real estate investment trusts (REITs)? How much time do you have to monitor all your divisions?

Consider whether some of your locales — i.e., different accounts such as a 401(k), an individual retirement account Roth, etc. — should be left to run smoothly on their own (perhaps employer’s plan in a target fund?), while others are dedicated to aggressive development (a small Roth in individual stocks?).

Conversely, you may want to look at the company holistically, such as locating investment divisions where they’ll achieve the best tax treatment depending on resources available.

Traditionally, this means keeping bond and bond mutual funds in tax-deferred accounts preretirement. But one of your divisions may be located where fewer resource options are available: You may not have an international bond fund available in your 401(k). A specific “division” may need to be spread across several “branch offices.”

Just-in-Time Inventory

Siddhartha Mukherjee pointed out, in a recent New Yorker article, that just-in-time failed for personal protective equipment because the sudden need dwarfed the stockpile. It can be hard to predict just when that need will occur. If normal needs are disrupted, the system fails.

It’s important to establish not only your goals — new house, child’s wedding, retirement — with specific dates attached, but also consider both average and worst-case projections. Most companies will be quite happy to beat analysts’ estimates, but failing disrupts the business — even to collapse.

What’s your need for cash and safe investments in an unexpected downturn, like a car crash, a new furnace or getting laid off at 59 when you’d planned to work until 67 with an employer match to your 401(k)? Will you need to liquidate some of the business? How will this impact the plan? Will some inventory be easier to liquidate now or resupply in the future?

Appropriate Risk for Your Business

A young entrepreneur who owns only a Tesla, and who is building a tech product in a parent’s garage, is probably going to be OK going bust, and can bounce back. Similarly, a 28-year-old investment “CEO” shouldn’t be too worried if the 401(k) is invested 100% in a stock fund that dips 30% or 50% — the business time line can survive the risk.

A CEO of a far-flung enterprise, with many dependents (a college tuition bill, a mortgage or retirement looming) will need to assess resources, including salable inventory (a house), operating expense reduction (discretionary spending) and free cash flow, as well as his or her own judgment to determine how much risk to take. Perhaps only part of the company’s total worth can be devoted to new and risky ventures.

Should You Pay Dividends, Reinvest or Accumulate for Future Purchases?

Long-time well-established companies in stable industries usually don’t grow much, but do pay steady dividends. In contrast, companies with an aggressive stance seeking to grow the business usually resist paying out any income, instead preferring to reinvest everything with the aim of compound growth and return. Where is your business in that cycle? Are you aiming for a steady income: taking investment dividends and year-end mutual fund capital gains in cash? Will you pay a dividend, but also reinvest some portion for future growth? For example, will you select some divisions (certain mutual funds or dividend paying stocks) to pay out, while others (growth stocks, capital gains) will be reinvested in either the current business or invested to fund new opportunities and purchases?

Produce Quarterly and Annual Reports

Any public company (and any well-run private company) produces annual reports. You’re not going to be scrutinized by the Securities and Exchange Commission, but it will be very useful if you write down your general thoughts about the state of the current market as it relates to your investment divisions — it can be astounding to look back on how you were feeling at a specific time. For example, in October 2008, when the market was beginning its lengthy plunge, I returned from a vacation to discover my portfolio value was halved. My response was, “easy come, easy go,” which told me my risk tolerance at the time was pretty high and guided me to buy more.

Is your money performing as expected? If not, why not, and is it permanent — like an investment in a Walkman company — or temporary? What was your year-end target amount and how far off are you? BI principles suggest that after three quarters of consistent bad news, you might need a change. But you can only decide that by balancing judgment with sober research. The biggest enemy of an investment venture is emotionalism — writing down both thoughts and hard numbers can curb temporary feelings.

When scrutinizing individual segments, it’s helpful to get a timely opinion. For mutual funds, review Morningstar’s analyst reports. For individual stocks, BetterInvesting’s features can give you perspective. I also particularly like BetterInvesting Magazine’s “Repair Shop,” for its take on specific stocks. I often don’t agree, but then I need to justify why. Write down your assessment. You may change your mind by the next quarter, or find you hate it even more. If you can’t justify the operation, then it’s time to divest.

Should You Change Business Focus?

Time marches on. A scrappy entre­preneurial venture (Apple, Microsoft, and maybe your all-stock investments portfolio) can grow into a solid operation where income is expected and valued over risky growth. Don’t be afraid to move your company in a different direction as your needs and the times change.

This article was originally published in the  October 2020  issue of BetterInvesting Magazine.

Danielle L. Schultz, CFP, CDFA, is a fee-only financial adviser with Haven Financial Solutions, Inc., based in Evanston, Illinois. she can be reached at

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