I have people who ask me this question. They think that because I started a business, sold it and because I make private investments that there is something special or unique about how I invest my assets. Let me be the first to say that the traits required to be a good investor are very different from those that entrepreneurs have. And I think I am still learning from the market and about myself all the time.
By default, entrepreneurs are high risk takers who control the risk by knowing everything there is to know about their business and industry. We deep dive into every aspect of our work so that we are able to control risk and maximize our returns. Even when our business has grown a lot, we continue to invest more into it and take further risk by going overseas or into adjacent markets. Frequently, the company we own is most of our net worth.
Furthermore, entrepreneurs are also highly passionate people and you will hear many successful ones who advocate a combination of gut and metrics to make major decisions.
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Good investors on the other hand, diversify. They minimize risk by not concentrating in one area and by proper portfolio allocation. And it is also humanly impossible for them to know with any depth any particular industry which they are invested in. They frequently outsource and use professional managers to help manage their money. Decisions are made based on numerical allocations and frequently a fixed methodology for deciding when to buy or sell. Investors who employ their gut tend not to do well.
My personal experience is that the above descriptions are totally true and one can lose a fair sum of money if one does not understand the very different traits required. I lost close S$100K or 100% of portfolio during the 2000 dot com crash because I had over-concentrated my positions in technology stocks. Then more recently in 2010, I experimented with options without clear knowledge of how volatile they can be and lost another S$100K on these, simply because I could not cut my losses and applied the dogged perseverance entrepreneurship trait to options!
From the above lessons, I learned that it is best for me, and perhaps for entrepreneurs like me, to stick to passive portfolio decisions and outsource the active selection decisions to good fund managers.
What this means is that we should make the decision on how much to keep in cash, how much to invest in stocks, fixed income and properties. But when it comes to the actual stock or fixed income picks, either buy ETFs which mirror the market or buy a few different mutual funds. Use dollar cost averaging strategies if we get more cash and rebalance the portfolio periodically every 3 to 6 months.
If the urge to take risk or to make decisions is too strong and if we have an interest in trading, then set aside a small percentage of assets – say 5% to make speculative trades on equities, options or bonds. The above philosophy has worked well for me and I hope it will work for readers too.
About the Author
Lim Dershing is the Director of Doctor Wealth Pte Ltd (www.drwealth.com), which is an online financial planning platform. Dershing is also an active angel investor in other digital media startups. His goal is to help via experience sharing, these businesses to grow to their full potential. His experience covers all the topics required to startup, build and scale an internet business in South East Asia.
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