How to Run Your Investment Portfolio Like a Business

The smartest business owners I know seem to approach business with two distinct, almost opposite mindsets.

In the first place, they push extremely hard to grow their businesses. They take meaningful risks to grow their market share, enter new markets, and to pivot toward new opportunities. They invest in the growth of their people paying for training and further education, they invest in the infrastructure and technology tools of their business to be able maximize each person’s productivity.

In short, they spend a tremendous amount of time, energy, and money on aggressively growing.

But what I’ve noticed is the smartest of them offset that aggressive mentality by holding large amounts of cash to weather economic storms. They war game and scenario test in order to have a game plan to survive and thrive through the bad times as well. Only a novice believes the good times are permanent. The economy ebbs and flows and the best business owners plan for both sides of that coin.

What’s interesting to me about that is how similar it is to what we believe is the most intelligent way to structure your investment portfolio.

We want to build portfolios that maximize our chances for growth over the long term. We accept the risks of the stock market knowing it has historically provided much higher rates of return than more conservative investments. We believe in general, that any investment money that will not be needed for spending within the next 5-10 years is often best invested in a thoroughly diversified portfolio of stocks.

If you think through that it could mean a 55 year old, planning to retire in ten years, may very well have 100% of their portfolio in stocks. Many people in our industry would say that’s too aggressive.

But we offset that aggressive mentality by insisting that any investment money that will be needed for spending in the next 5-10 years should stay as far away from the stock market as possible.

If you think about the investment world as a spectrum of risk and return, our strategy would look like a barbell. All the long term dollars (not needed in the next 5-10 years) would be invested on the far end of the risk/return spectrum while all the short term dollars (those needed in the next 5-10 years) would be clustered on the extreme opposite end of the spectrum where we hold nothing but short term, very high quality bonds and cash.

This way we’re capturing as much return as possible with the dollars that have the time horizon to weather market storms and taking as little risk as possible with those dollars we need to be sure will be there and intact in the short term.

Many advisors portfolios try to straddle the fence in this regard. They get complaints from their clients that their safe money isn’t earning enough (or any) return so they push the dollars that need to be safe and stable toward the middle of that risk/return spectrum. They take on more risk with those in an attempt to earn a higher rate of return. In the business, that’s called “Chasing Yield”.

They might do that by holding more aggressive bonds. But remember, buying bonds is just lending money. More aggressive bonds are just lending money to folks (companies, municipalities, governments, etc.) that have a poorer track record of repaying their loans and/or lending the money for a longer time. With interest rates at or near all time lows how eager should we be today to lock those terrible rates in for a long time? So those don’t really sound like good options do they?

Or they may get complaints from their clients that their long term money is too “risky” so they push those dollars toward the middle as well. They try to find a way to reduce the risk, even of the long term money, without reducing the returns too much.

They might do this by holding bonds that are convertible into stocks, or “market-linked” CDs, or equity indexed annuities, or preferred stocks. All of which are simply an attempt to earn stock-like returns with bond-like risk.

Think about that.

If it was possible to get stock like returns with bond like risk why would anyone ever hold stocks at all?

My opinion, for what it’s worth, is that those investment options are generally just cleverly packaged ways for Wall St. to get Main St. to part with their money.

Smart investors, just like smart business owners realize that having a big stash of cash allows them to be aggressive throughout the rest of their business. They don’t try to predict the future by being conservative just before the economy slows and aggressive just before it picks back up again. They realize no one can reliably predict those moments with any consistency.

They simply build a strategy that is aggressive where its appropriate and have a big war chest to get through the bad times. Your portfolio should do the same.