Building Wealth Outside of Your Business

Many entrepreneurs are so focused on their business that they don’t invest outside of their company. But they should.

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When Brendan Charters started renovation and home building company Eurodale Developments in 2003, he made a promise to himself: he wouldn’t plow all of his assets into his business. Many owners have a lot of their wealth tied up in their companies, but he didn’t want to be exposed to a single sector and company. “The old adage of ‘don’t put all your eggs in one basket’ was not lost on me,” he says. “I know the value of diversification.”

Unfortunately, it’s a lesson that many other entrepreneurs don’t pay enough attention to, not because they don’t know that it pays to be diversified, but because they’re so hyper-focused on their business. Even Charters, who has an RRSP and a TFSA, has 90 percent of his wealth tied up in his company, he says, but he’s always working at balancing his business and non-business investments out. “We need to insulate our investment dollars from the market swings that will impact our daily operations,” he says.

So how can entrepreneurs diversify away from their companies? The first step is to make sure you allocate some of your salary to RRSPs and TFSAs, just like any working Canadian should, says Jack Courtney, Vice-President of Private Client Planning at Investors Group. Consider automatic transfers from a main account into an investment account, which will allow you to save without even thinking about it.

The next step is ensuring that those dollars go into diversified investments. “Mutual funds or pooled funds can provide significant diversification,” he says. “This can be further enhanced through selecting investments that provide geographic as well as sector diversification.”

If someone owns an oil and gas service company, for instance, they might not want to hold a natural resources fund.

For some business owners, this is easier said than done. Some buy investments in their own sector because it’s what they know. Courtney cautions against doing this. If someone owns an oil and gas service company, for instance, they might not want to hold a natural resources fund. Even if that fund would make up a small percentage of an overall investment portfolio, add the business into the equation and that single sector could become an even more significant percentage of the person’s wealth.

Fortunately for Charters, he didn’t fall into this trap. He knows how volatile the real estate and construction sectors can be, so the less exposure to the sector, the better. While some of his mutual funds may hold real estate-related companies, like a real estate investment trust, he’s made sure not to own any real estate-focused funds.

Naturally, it helps to get professional advice, especially because owners spend most of their time thinking about their business, says Courtney. Consider using tax specialists as well as financial advisors to help make sure your wealth is being properly looked after. Charters has enlisted lawyers, accountants and advisors. “They can teach you the ideal way to structure your corporation which is a huge advantage with different investments strategies,” he says.

Ultimately, knowing that he’s not concentrated in a sector and that his wealth is spread out, allows him to rest easy and concentrate on what he does best: build beautiful homes for his clients. “Being diversified brings us the comfort we need to sleep well at night,” he says.

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