A Well-Rounded Portfolio

Investing in your own business makes sense. Many businesses grow 15 percent or more each year. At that rate, the value of your company would double in about five years.¹ This is striking compared to the –performance of the S&P 500, which averaged a 10.3 percent annual return over the last 50 years.²

However, when you consider that an estimated 544,800 small businesses (roughly 10 percent of all U.S. small businesses) closed in 2005, it becomes clear that banking your retirement solely on the success of your business might not be the best idea.³ There is no guarantee that your business will continue to grow or even maintain its current value. If your business is worth less than you were counting on at the time you planned to retire, you could be forced to continue working or sell it for less than what you were expecting.

Business owners often assume that their businesses will be their main source of retirement funds, but that strategy can be riskier than you think.

Diversification Can Help Reduce Risk

Diversification involves dividing your assets among several investments to help protect against risk. It is the financial equivalent of not putting all your eggs in one basket. Putting all your money into a single investment is risky because you could lose everything if the investment performs poorly – even if that investment is your own business. Of course, diversification is a method used to help manage investment risk; it does not guarantee against loss.

Consider what would happen if you were planning to rely solely on the sale of your business to fund your retirement, only to have the U.S. economy fall into a recession about the time you planned to retire. Although recessions happen infrequently in the U.S. economy, they occur nonetheless. If one occurred when you planned to retire, it could affect the sale of your business or the income it generates for you.

Likewise, there is no assurance that a larger competitor won’t overtake your market, or that demand for your business’s goods and services won’t weaken because of new technology, rising energy prices, consumer trends, or other variables over which you have no control.

Your business is almost certain to provide some of the money you need to retire. Building a portfolio outside your business can help ensure that your retirement is not exposed to the same risks as your business.

1) The National Federation of Independent Business, April 28, 2005
2) Thomson Financial, 2006, for the period 7/31/1956 to 7/31/2006. The S&P 500 Composite (total return) is generally considered representative of U.S. stocks. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results.
3) U.S. Small Business Administration, June 2006