Wealth

Creating Wealth Is Different From Maintaining Wealth

Creating Wealth Is Different From Maintaining Wealth
Image credit: Shutterstock

Get the working capital your business needs from Entrepreneur Lending, powered by CAN Capital. Learn More »

As an entrepreneur, you may someday find yourself holding a really big check in your hands after selling your business, or having a major liquidity event occur, and thinking: This is awesome, but what do I do with this money?

Related: 8 Money Mistakes to Avoid on Your Way to Being Wealthy

Being the smart, successful entrepreneur you are, you will surely decide to be responsible and invest the cash instead of buying that new jet. You'll have a few financial advisors, a lawyer and a CPA you can turn to, because investing your windfall will have suddenly become your primary business.

The bottom line here is to understand that creating wealth is far different from maintaining wealth. Creating wealth means taking on idiosyncratic risk, and maintaining wealth involves a diversifying strategy with a long-term view. When an entrepreneur becomes an investor, he or she needs many skills to manage this capital. So, if this life-changing event happens to you, don’t simply jump into it. Consider the facts, as you would any other new business endeavor.

1. Do you have the skills necessary to manage this capital?

You should consider how much you know about both the public and private capital markets. Are you patient enough to ride through long periods of difficult returns? Do you know what really drives those returns? This stage in particular is where the vast majority of newly wealthy entrepreneurs stumble in their process.

2. Do you have an infrastructure to support you in this new endeavor?

Going it alone can be very challenging. In addition, selecting the right people can be equally challenging. There is more to the process than just investing. Monitoring and screening deal flow for this capital is equally important.

3. What are the behavioral drivers that influence this new business?

Running a business is something you can do every day. Managing a portfolio oftentimes requires waiting -- and for long periods of time.Think of the tortoise and hare. We all know how this story ends. The tendency is for people to want to over-manage their portfolios, which can unknowingly add a tremendous amount risk. Too much risk can sadly lead to complete failure.

The above tips give you a glimpse of some of the issues you will face in making this transition. Now, let’s focus on three more to guide you through this transition.

Related: 6 Simple Strategies for Better Money Management

4. Family is important. Create an investment policy statement for them.

Such a statement is very much like a business plan, and all entrepreneurs should know how important it is. An investment policy should include who, what, where and why. Consider the types of assets possible and the minimum and maximum amount of each you will hold. Who is responsible for managing these assets and monitoring them as time goes along? Your policy might even consider the process for making changes to those allocations.This is the document that will drive all of your decisions.

5. Goals, goals, goals. Identify what you want to achieve. 

You might consider your return goal -- within a well-defined plan for risk -- as being a level of return that covers inflation, fees, taxes and some component for real growth (probably around 2.5 percent). Entrepreneurs have what we call a low-risk-aversion parameter as wealth increases.This means that they are willing to accept lower returns for potentially much riskier deals.This mainly comes into play when they are approached by a “friend” to invest in the next Google.

6. Understand what the drivers are. Recognize your lack of control. 

Understanding the drivers of both private and public capital markets is crucial. When are things "expensive" vs. "cheap"? Having some guidelines and a process will help. It is not intuitive, but the information needed is available. For example, the best recent time to buy stocks was spring of 2009; the worst times were spring of 2000 and fall of 2007.

As a businessperson, you likely felt that you had considerable control over the direction of your firm.You lack that same control day-to-day when working with outside investments.This may be very uncomfortable and cause you to overreact as markets fluctuate.

Making the transition from a business owner to an investor offers many challenges. A few have been mentioned here. The important points include taking stock of your skills, preparing a plan for what you want this money to do and getting the right people to help you run and manage your new business.

Related: 9 Success Habits of Wealthy People That Cost Nothing