In this episode: Once money leaves the business, where should it go? Jon Peyton explains how to weigh risk against reward, why your investments should be measured against the return your own plan requires rather than an index, and what to look for if you hire professionals to help.
Key insights
- Higher potential returns come with higher risk. Some investments may take years to pay off, if they ever do.
- Measure your investments against the rate of return your plan requires, not against the S&P 500.
- Compare options by opportunity cost, involvement and volatility, not return alone.
- Cash that earns less than inflation loses purchasing power over time.
- If you delegate, look for someone who connects planning, investing and your business, not just someone who manages money.
Episode timeline
- 0:00 From business investing to personal investing
- 0:56 The squeaky wheel gets the grease
- 2:20 Where should money pulled from the business go?
- 4:07 Risk is tied to every return
- 5:33 How venture investing works
- 8:12 Balancing safety, moderate growth and higher risk
- 9:49 Important disclosures
- 12:28 Your required rate of return
- 14:16 Adjusting risk as your goals get closer
- 15:08 An illustrative real estate comparison
- 18:42 Opportunity cost
- 20:49 When cash doesn’t keep up with inflation
- 21:35 How to choose a professional
- 24:53 Why comparing yourself to an index misleads
The episode in brief
Stop chasing fires. The squeaky wheel gets the grease: whatever is on fire gets our attention, whether it’s work, family or a falling market. Planning ahead is how you get to a point where nothing is on fire. That’s the purpose of thinking deliberately about where money pulled from the business should go.
Every return carries risk. Stocks, bonds, real estate, commodities, crypto, hedge funds and private equity all offer different potential returns and different risks. An investment promising 20% to 30% a year could put your money in harm’s way. Jon describes how venture investing works: many startups fail, some return a few times the money, and an occasional standout pays for the rest. That profile may not fit someone working toward a specific goal on a specific timeline.
Know the disclosures. As Jon notes on air, past performance doesn’t predict future results, you can’t invest directly in an index, and diversification doesn’t guarantee a profit or protect against loss. Everything here is general education, not a recommendation.
Measure against your plan. A financial plan tells you the average rate of return you need to reach your goals, given your savings and timeline. Compare each investment’s potential return and risk with that number. With decades ahead, you may accept more volatility. As your goal approaches, you may reduce risk to protect what you’ve built.
Compare more than returns. Jon walks through a hypothetical rental property and compares its potential return with other options. Consider opportunity cost, how involved you want to be, how volatile each option is, and the tax differences to discuss with your CPA. At the time of recording, inflation had just been reported at 8.3%, a reminder that cash earning very little loses ground.
Choosing help. If you delegate, Jon believes money management without planning is like running on a treadmill without knowing your goal. Look for someone who understands planning, investing and business, who can coordinate with your CPA, attorney and insurance professionals so you’re not the hub of every spoke. Make sure their goals align with yours.
Don’t compare yourself to an index. Clients sometimes ask why they didn’t match the S&P 500. Most diversified portfolios aren’t built like the index. The better question is whether you’re on track for the return your plan requires, and if not, why.
Key action items
- Find your required rate of return. Work with a planner to calculate the average return your goals actually need.
- Map your current investments by risk. Sort them into safety, moderate growth and higher risk, and check the mix against your timeline.
- Check idle cash against inflation. Decide what cash you truly need on hand, and give the rest a purpose.
- Interview advisers on planning, not just returns. Ask how they connect investing to your goals, taxes and business.
Listen next: Episode 31: Successful Entrepreneurs Do This to Lower Their Business Taxes
Value Creation Consultancy™ has since merged into Founder’s Accounting™.
Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results.
This episode is educational and isn’t legal, tax or financial advice. Speak with your own attorney and advisers about your situation.