While on the one hand it is very difficult to become financially independent with paper or financial assets only, it is also very difficult to grow entrepreneurial assets substantially without the help of financial assets.
This is not a blog about one being good and one being bad or even one being better than the other, but in this part 4 of the series I would like to help you think about how these assets work together and how a balance between the two can create a very solid financial future. If we are to become financially independent, we should really work hard to have the proper balance between entrepreneurial assets and financial assets.
Let me define those terms. Paper assets are the typical and traditional stocks, bonds, mutual funds, bank accounts, CDs, and any account whose balance is ascertainable through a statement or viewing the account balance online. Entrepreneurial assets are those assets such as business interests in corporations or LLCs, partnerships, as well as various types of real-estate. Generally, entrepreneurial assets’ value cannot be determined until after you get a real, bona fide offer.
Let’s consider a couple differing characteristics of these two types of assets. First, let’s think about them in terms of risk, then we’ll think of them in terms of possible and realistic rates of return, and finally, we’ll think about them in terms of liquidity.
Which of these statements is true:
- Broadly diversified mutual funds are safe.
- Small Business Ownership is risky
Many in my field and many other financially-minded professionals would say those are both true statements. However, to an entrepreneur, those statements may be false, and the entrepreneur may very well be right.
Consider for a minute that financial assets’ or mutual funds risk is measured by beta, which to a business owner means absolutely nothing, especially as it pertains to their business. Many business owners would say that a better measure of risk for an asset is the ability or inability to exert control over that given asset. Meaning if you can exert control over a given asset, the risk may be diminished. Conversely, if you owned Bitcoin or Coke stock you really have no control over the volatility of that assets’ price.
Realistic rates of return for financial assets are in a range from 1% - 10% (over long periods of time), whereas realistic rates of return for small businesses can be 10% or 25% or 50% or more. Going back to the issue of control, an entrepreneur has a lot of control over how they grow their business, in which market niche they should be, and how they should overcome obstacles as they pertain to the business.
Since entrepreneurial assets have the ability to grow much faster than financial assets, we still need to consider a wise balance between the two. For example, without additional capital, entrepreneurial assets may not be able to grow and may even diminish. Thus, financial assets are needed for downturns in the business as well as for business opportunities that will invariably end up in the entrepreneur’s inbox.
In summary, there’s no magic to the right balance between entrepreneurial assets and financial assets, but it does take careful consideration and thoughtful analysis to bring about the right mix of the two. Since the future of one’s business, or the real estate market, or the stock market is truly unknown, especially over a finite period of time, it is wise to work to strike that wise balance of the two.
Ideally, and this is very difficult to accomplish, the goal I have for my clients is that they become financially independent with their entrepreneurial assets and with their financial assets.
Up next, we’ll get into #5 of the 10 Most Common Business Owner Blind Spots series – Asset Protection. Stay tuned!