Innovation

4 Bad Investing Habits Worth Breaking

Entrepreneurs are prone to a few behaviours that put their portfolios at risk. Here's how to counter some of the biggest self-imposed threats

Written by M. Corey Goldman

Entrepreneurs tend to be excellent multitaskers whose nature is to take on even more. But as Robert Cherun found, the business of managing your personal investments is one task an entrepreneur would do well to delegate.

Cherun, managing director of UCIT Online Security, used to work at Morgan Stanley, so he’s well qualified to manage his portfolio. But, he admits, he underestimated how much time it would take to do so on top of running his video-surveillance firm in Mississauga, Ont. “I would analyze a company, fall in love with it and invest in it,” says Cherun. “But then I’d forget about paying attention to it—only to realize that it had either done really well and I should have diversified out of it, or that I should have exited what had become a worthless stock.”

Any investor could fall into this pitfall.

But it’s one of several that the entrepreneurial mindset makes business owners especially prone to. Here are four bad investing habits to watch out for and how to counter them:

Doubling down on your sector

Entrepreneurs often invest largely within their own sector, where they have expertise. “But if I’m in the real estate business, [my portfolio] shouldn’t be in more REITs or other real estate investments,” says Susan St. Amand, an advisor at Sirius Financial Services in Ottawa. Investing solely in the sectors you know best (i.e., your own) means missing out on good opportunities elsewhere. It also means doubling down on the sector your business is in. To avoid this risk, consider setting investment criteria that will lead to a diversified asset mix, then put your money to work in any industry meeting these criteria.

Backseat investing

Mark Weisbarth, who founded and sold Toronto ad agency Due North Communications, concedes that his DIY mindset made it tough to let his investment advisor get on with the job. “For me, all the risk was tied up in my entrepreneurial venture, so I was loath to take on any other risk at all,” says Weisbarth. “I’d see a slight gain or loss, call up my advisor and say, €˜Git, git, git—let’s get the money off the table,’ instead of letting those with more time and expertise make that call for me.” Ironically, by being so risk averse, Weisbarth fell short of his targeted return.

Many entrepreneurs, after handing off the driving to an advisor, can’t resist grabbing the wheel. But, warns Jeff Westeinde, executive chairman of real estate developer Windmill Development Group in Ottawa, “You can’t be calling up your broker and switching up your portfolio with every investment idea you hear about in the locker room.”

Successful delegation requires the same balancing act it does within a company: neither micromanaging nor giving too little direction. Set clear goals for your advisor and—barring an emergency—review performance annually. Then force yourself to step out of the way.

Starving your outside investments

Most entrepreneurs have most of their wealth tied up in their business. (See “Is it time to pocket your profits?” at PROFITguide.com/pocket.) But any single investment is inherently far riskier than a well-diversified portfolio. You’re taking a big gamble if you leave so much in your business you have little to invest elsewhere.

Lee Helkie, a partner at Helkie Financial & Insurance Services in Toronto, says many entrepreneurs learned how risky betting almost all your chips on your firm is when business valuations plummeted during the 2008-09 financial crisis. Several of her clients saw a steep drop in their net worth that wasn’t cushioned by other holdings. That left them stuck running businesses they were keen to sell.

There’s no consensus on how much of your net worth you should invest outside your firm. But business owners can apply two rules of thumb adapted from prudent advice for any investor. Pay yourself first by allocating a set percentage of your share of company profits to outside investments. And, as you get older, boost this percentage steadily to reduce your overall risk.

Falling in love with risk

If your company is doing well, your rate of return from it will likely be much higher than outside investments can offer. So, it’s tempting to load up your portfolio with risky assets in hopes of generating comparable returns.

“The thing that blows my mind is that the entrepreneur is in a high-risk business and then the portfolio also is high risk,” says Helkie. “It makes more sense to take a long-term, conservative approach than to put it all into equities.”

Doing so requires accepting that your investment portfolio’s role is to balance the risk of your stake in your business. That means being realistic about the rate of return you should expect, says St. Amand: “Anything above 6% to 7% these days is great.”

Originally appeared on PROFITguide.com