Entrepreneurs typically have much of their wealth tied up in their businesses. This concentration of capital can generate significant returns. For example, 89 Chinese and 30 American business owners became billionaires in 2017, according to the 2018 UBS/PwC Billionaires Report.
But concentration can also have a number of drawbacks. It can reduce available liquidity to finance expenditure needs. It can lead to overexposure to a single country, currency, and asset class. And it can spur lapses of judgment that harm wealth. Equally, salaried executives depend on the fortunes of the firm and the industry in which they work and are often largely paid in their company’s stock, leading them to hold far more of it than they might by choice.
Private business owners that are members of the UBS Industry Leader Network* say families that diversify their assets and income away from their main business can work with a long-term mindset. Entrepreneurs should consider releasing capital—through drawing dividends, borrowing, and other tax-efficient vehicles—for reinvestment to diversify their exposure.
- Diversify your existing business. Entrepreneurs could buy another venture. In the ideal case this could create a second fortune—for example, some entrepreneurs in the coal industry were quick to spot the potential of shale. On the downside, this strategy can be risky, and does not provide the same diversification benefits as a portfolio of publicly traded securities.
- Don't give up on stocks. Owning a business doesn’t mean you should avoid stocks that offer high potential returns. The correlation between individual micro-cap stocks and the S&P 500 index is very low, so entrepreneurs are not typically as overexposed to equities as they might believe. Entrepreneurs with more mature businesses may prefer a traditional diversified portfolio split between global equities and bonds. Younger entrepreneurs with fast-growing businesses and long investment horizons may look for higher-risk options.
- Tailor your portfolio where needed. Entrepreneurs may want to “tailor” their portfolio. You might look to reduce portfolio exposure to regions, countries, or sectors to which your business is significantly exposed.
- If you can't beat them, invest in them. One of the bolder approaches is to look for businesses with the potential to disrupt your firm. Several manufacturing entrepreneurs in the UBS Industry Leader Network*, for example, are increasingly investing in automation and smart production lines to avoid competitive threats. We identify a number of long-term investment themes that seek to take advantage of disruptive trends.
- Hold enough liquidity...but not too much. Entrepreneurs typically need more liquidity than the average investor, for example to pursue opportunistic business projects. But entrepreneurs often hold more cash than they need, even for an emergency. We recommend that business owners hold three to five years' worth of lifestyle expenditure in liquid assets. Beyond this amount, entrepreneurs run the risk that their portfolio won't contribute to achieving their financial goals.
Holding assets outside your business can help you reduce swings in your income, make it easier to rebound from setbacks, and maintain your obligations to family and charities. External investments can also help you seize opportunities, fund future projects, and protect your wealth. Read more in our report, “How to diversify as a business owner .”
*The UBS Industry Leader Network is a global group of UBS clients and prospects who are private business owners and executives. Their views may differ from those of UBS.
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