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October 5th, 2011 posted by David Finkel (Taxloopholes.com Advisor)

I was talking with one of our consulting clients Todd last week and we had such an interesting conversation about how to build wealth independent of your business.

It was sparked when I shared my observation of how so many business owners I know build a great company, sell it for multiple millions, then proceed to make HUGE financial mistakes as they invest the proceeds from their business’s sale.

They spent 10 years building a multi-million dollar asset, only to lose a significant portion of that equity over 36 months after the sale through dumb financial decisions.

In today’s world it isn’t enough to be a smart business owner, you must also learn how to be a savvy investor.

Suggestion One:  Invest a portion of your time and energy (at least 10 percent) to creating and executing your wealth plan. Building a successful business is obviously going to be a big part of that plan, but it cannot be the only leg to the plan.  Why?  Because there will be a day you may no longer have the business.  Either you may sell the business, then you’ll need the skills of how to invest the cash from the sale to generate the passive and passive residual income you need.  Or the business could fail, in which case it will be even more important to have “run some of your money from the table” and have this money invested wisely in a way that ensures your financial future.

One of my friends Kevin is a successful business owner.  Kevin’s financial plan calls for him to build a great service business, but he doesn’t stop there.  He also invests a portion of his time and financial resources in building his family’s investment portfolio.  He allocates his portfolio into three equal buckets:  one third equities, one third fixed income investments (which for him is primarily hard money real estate loans he makes), and one third commercial real estate.

While this allocation is specific to him and his situation, what is important is that you as a business owner have a wealth plan bigger than just running your business.

What are the other legs to your financial freedom stool other than your business?

What are your other investment vehicles?

And most importantly, how are you upgrading your expertise in these vehicles TODAY?

Suggestion Two:  Leverage your strengths when looking for investment opportunities. There is a learning curve in mastering any investment vehicle, which is why it is so valuable to leverage the advantages you already have.

For example, one of our clients Cynthia has been a smart investor in real estate for over a decade.  She recently asked for my input on an investment opportunity someone shared with her (it was for a non-real estate opportunity).

I asked her how much she knew or understood about the underlying investment.  Very little she replied.  I then asked her how long would it take and how much effort would it take for her to become savvy in this new arena.  Quite a long time and effort she said.

At this point she got it and realized that she could leverage her real estate strengths versus trying to become an expert in a whole new domain.

Do you know a specific industry and have a network of contacts that give you information advantages?  (NOTE: If you are investing in publically traded securities you have to be wary of trading on “insider information”, that is information that is not publically available.  Which is one of the reasons I like investment vehicles other than publically traded securities since I not only get paid for my “insider information” but in these other areas it is totally ethical and legal to trade on this privileged information!)

Take the example of Stephanie, one of the Maui Advisors.  She invests in tech start ups located near her company in northern California.  She can leverage her experience, her network, and her symbolic capital to supercharge her returns and access some great investments.

What are your advantages?  What contacts, expertise, and experience do you have that you can leverage?  Are you currently maximizing the advantages you already possess?

Suggestion Three:  You must become your own most trusted investment advisor–no one can do it all for you. Too many people make the monumental mistake of thinking that investment success is a matter of choosing the right investment advisor to handle your wealth for you.  It costs them dearly!

No one–I repeat, no one–will be able to manage your wealth like you can.  Yes you need good advisors, but you need to have the sophistication to filter and use the best of your advisors.

This means you’ve got to invest the time, energy, and money to master the skill of managing your own net worth. I’ve watched countless business owners spend 10 years building a multi-million business which they then sell and through dumb investment decisions they lose all the money they had made with their businesses and they are forced back to Level One to start building over from scratch.

In fact I have a friend who five years ago sold his company for just over $4.5 million cash, and he lost over $4 million of that money through bad investments that in retrospect he realizes he never should have made.

Investing your money is a totally different skill from making your money originally.

Generally as a business owner you’re imprinted to take on more risk chasing higher returns. This may serve you well in the building of your asset base where investing for forced appreciation and capital gains makes sense, but it will come back to haunt you if you don’t make the transition to investing for PRI (passive residual income) when you reach Level Three.

Have a great rest of your week.