Align Your Business and Personal Planning

Through the economic downturn, a majority of business owners lost wealth in the form of business value and at least as many lost personal wealth in the stock market. For many this spelled doom or near catastrophe. It didn’t have to be that way. Business owners have more and different risks than the rest of the population—and a system that takes that into account could have made a big difference. Everyone with a portfolio has market risk, but businesses have credit risk (at least indirectly), business risk, and economic risk—not to mention risks to the business owner in asset protection and the human element. Typically financial advisors and planners recommend an asset allocation based on risk tolerance, investment time horizon, etc., which is fine if managed appropriately. However, when managing risk with financial assets, a different approach is required for business owners, especially when the business represents a significant portion of their hard-won wealth. A new approach that business owners should consider is to divide their financial wealth into three buckets, each with its own risk characteristics: 1. Personal risk. The focus here is safety and liquidity and includes things like CDs, bank accounts, fixed annuities, insured accounts, fixed account life insurance, and other types of guaranteed funds. One could benchmark these assets to the CPI or even short-term treasuries.

2. Market risk. The focus here is growth for future lifestyle maintenance (assuming the investor is preretirement) and includes stocks, bonds, mutual funds, and other publicly traded securities. Likely benchmarks include the Standard & Poor’s 500-stock index, bond indexes, and/or combinations based on investor goals, timelines, and risk tolerance.

3. Aspirational risk. The focus here is significant wealth accumulation (and creation) for the business owner. This is the riskiest of the risk buckets, but may in fact produce the most return. It includes the business and personally owned investment real estate.

By allocating risk this way, business owners can be better prepared to face both crisis and opportunities.

Carlos H. Lowenberg Jr. President Lowenberg Wealth Management Austin, Tex.