Invest for Financial Independence

A red flag is when a founder buys a huge house and a fancy car when they receive their first investor payout. The likelihood that owner is making conscious spending decisions and investing their personal income, let alone their business revenue, is very slim.

Investment Pyramid

You’ve been deferring 10% percent of income into investment accounts, now you need to select investments. The investment pyramid describes options generally, but check it against the actual market. You must consider expense ratios. Not just the average return rate, but the cost of returns with fees. The index fund S&P 500 has returned an average 8% including inflation. Mutual funds can have consistent returns but have high fees. Day trading or active management of Individual stocks is prospecting and high risk. No one can predict the market only sometimes trounce it. Cryptocurrencies are not established and are considered high risk.

Other Investments

With research you can select and diversify your investments. Outside of the stock market- art, rental properties, and business ventures are common investment opportunities - each having different associated costs.

Allocation Percentages

Allocations help diversify investments. A broad-based portfolio protects against concentrated risk; if say, the real estate bubble pops. For example: 20% domestic equities, 15% developed world equities, 10% emerging markets, 15% REITs, 15% government bonds, 15% TIPS, and 10% cash. Target date funds adjust risk tolerance by years to retirement. For example at 40 years to retirement and high risk tolerance - 80% stocks, 15% bonds, and 5% cash. In contract, at the beginning of retirement and low risk tolerance - 30% stocks, 50% bonds, and 20% cash.

Risk is not inherently bad. It typically means a higher return on investment if things goes well. You need to manage the risk for consistent long-term gains. Diversify within your area of expertise and outside of your industry. Whether you’re an employee or owner, consider any investment in your own company’s stock as aggressive growth investment. Don’t invest more that 25% of your portfolio in your own company’s stock. Fidelity releases a report on the Business Cycle Approach to Asset Allocation.

Additional Resources

https://institutional.fidelity.com/app/proxy/content?literatureURL=/953042.PDF

https://www.forbes.com/advisor/investing/what-is-asset-allocation/

Influencers

Morgan Housel

Dan Solin

Ron Lieber

Bogleheads Forum

Ramit Sethi

Thank you for reading, Beyond Business: Musing from a socially conscious international small business.