15 “Cardinal Rules” for Entrepreneurs and business owners with money to invest.

This article was originally featured in Fast Company.

As a long-time investor and entrepreneur in the wealth management industry, I’m passionate about guiding entrepreneurs with principles to live by when it comes to turning business success into long-term wealth and legacy.

Entrepreneurs and business owners don’t always make the best investors. The very traits that allow them to find success in business can become their downfall when it comes to putting to work the wealth they have worked so hard to create. As a long-time investor and entrepreneur in the wealth management industry, I’m passionate about guiding entrepreneurs with principles to live by when it comes to turning business success into long-term wealth and legacy.

WHY ENTREPRENEURS AND BUSINESS OWNERS DON’T ALWAYS MAKE GREAT INVESTORS

Building a successful business requires a few key traits, including comfort with risk-taking, self-reliance and belief, an ability to make quick decisions, and a complete and total emotional investment in your “baby”—your idea or your product—which fuels the ability to overcome adversity.

When it comes to investing, however, these can quickly become your Achilles heel because there are far fewer things one can control. We often see entrepreneurs and business owners who are unable to separate emotion and even their identity from their investment strategy, and who find it hard to delegate to anyone, much less to someone you need to trust with the fruits of your life’s work.

AVOIDING THE “SHIRTSLEEVES TO SHIRTSLEEVES” PHENOMENON

It’s present in every culture and has been documented throughout history: First-generation wealth creators’ legacies rarely extend beyond the third generation. It’s a curious thing and one that we’ve built our business around solving.

Coming into wealth as a business owner means that you likely dream of creating a legacy that extends beyond your lifetime. Creating a legacy often means working through family dynamics, and a solid financial blueprint should include planning on how and when you might bring future generations into managing your assets. Investing your money wisely is the best way to power your legacy sustainably across multiple generations, and that starts with being comfortable in delegating authority to make decisions to a trusted and proven adviser.

KNOW WHEN TO FIRE YOURSELF

When I emerged from my doctoral program in economics and thought about what a career in wealth management might look like, I didn’t realize how much of my job would be about people and psychology, rather than about the mechanics of investing money. Working for the past 25 years with families and individuals who are navigating the dynamics that come with wealth, I’ve come to appreciate that the act of hiring an adviser is the hardest for business owners. Trust develops not only when expectations are met, but when families know that you are aligned with their best interests. A lot goes into engendering that.

“Trust, but verify,” as President Reagan once said. It’s only then that entrepreneurs and business owners typically become comfortable with “firing” themselves and delegating authority to an adviser.

CARDINAL RULES OF INVESTING

Yet, being comfortable with hiring the right adviser is just where the journey begins. While it is difficult to make specific investment recommendations about what to invest in without knowing individual goals, there are enduring lessons that apply to every situation. We call them the Cardinal Rules of Investing, and while on the surface they may seem pithy and light-hearted, each ‘rule’ helps build the foundation for long-term success, regardless of your goals.

1. Manage For Risk, Not Return. Simply put, aim for a return with the greatest amount of certainty and the least amount of risk to narrow the range of potential outcomes.

2. Your Greatest Assets Have Nothing To Do With Money. Spend time thinking broadly about your life strategy and your potential legacy to ensure investments are always made with the right context.  

3. Stay In Control Of Your Emotions. Better yet, separate emotion entirely from your portfolio.

4. Focus On What You Can Control. Perhaps the hardest for the entrepreneur who has proven success under their belt.

5. Know When To Fire Yourself—and hire an expert.

6. Know What You Own And Why You Own It. Divorcing from your emotional investment and hiring an expert doesn’t mean you don’t stay involved and informed.

7. Make Sure Someone Knows Your Big Picture. It’s key to have at least one person who has a global view of your finances.

8. Diversify Forward, Not Backward. Base allocation decisions on future expectations, not historical data.

9. Capital Markets Lead The Economy, Not The Other Way Around. Did I just blow your mind? There’s a reason traditional forecasting is lousy at predicting downturns.

10. Don’t Waste Time Timing The Markets. This is a fool’s errand. Full stop.

11. The Case For Cash Is Timeless. Long before the pandemic, our CIO authored a controversial piece on why we require clients to hold two years of spending in cash. It’s no longer controversial.

12. Leverage Is A Double-Edged Sword. Leveraging capital to grow your business can be a strategic win; borrowing to boost returns can be disastrous.

13. Be Careful Dabbling In Private Markets. Know when to say “no” to well-meaning friends and family members with “great opportunities.”

14. Don’t Mistake Products For Advice. Financial products can’t appreciate the complexities of your personal situation.

15. Reject Jargon; Demand Straight Talk. Investments should be thoughtful and intentional, not overly complicated.

There’s nothing an entrepreneur and business owner enjoys more than mastering a challenge or solving a problem in a novel way. While history may be full of stories of cautionary tales, successful entrepreneurs and business owners can be successful at investing in a way that powers their legacies for multiple generations—these cardinal rules hold the key.  

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