No matter the nature of your business or what style of entrepreneur you are, there are common challenges we all face.
Throughout your entrepreneurial journey, keep the following challenges in mind — especially when you approach your personal wealth management.
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1. Risk-taking
The beautiful risk-taking spirit we possess as entrepreneurs also represents our number one challenge. If you don’t like to take risks, you cannot be an entrepreneur at all. However, the tendency to take risks often damages long-term wealth.
Take some friends of mine, whom I will call the Newtons. They have a government contracting business that provides IT consulting to both commercial and federal entities in Washington, DC. The business has boomed wonderfully, but they reinvest all their money back into their business.
Their sales have grown to almost $10 million a year, but they don’t pay themselves much in salary, and out of all that revenue, they save only about a thousand dollars a month. The Newtons are willing to risk literally everything they have on their business to make sure it scales rapidly and massively. Again and again, I have asked my friends, “What if something goes wrong?”
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2. Overconfidence
The entrepreneurial trait of overconfidence is closely related to risk-taking. Once again, some overconfidence is probably part and parcel of being an entrepreneur. If you were not unreasonably confident, you wouldn’t launch a business. If you had too much self-doubt, you’d probably prefer the security of being employed and told what to do.
But overconfidence often leads to downfall. My friends, the Newtons, are certainly overconfident. Even at $10 million in revenue, they forget that they represent a very small business in the government contracting arena and that a rival could easily quash them.
The worst of overconfidence comes when you assume that because you are good in one kind of business, you will be good in another kind of business. It is simply impossible to be good at everything, but many entrepreneurs aspire to become “serial entrepreneurs,” dabbling in one kind of business after another. Rarely does this work out well.
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3. Avoiding financial advice
When good businesspeople run an enterprise, they wisely turn to their COO, their directors, and many other experts to cross-check their business ideas. If they have a bad idea, they will be held back by their advisors.
But when it comes to their personal finances, especially after they retire, entrepreneurs too often rely on their own genius to manage their wealth. After retirement, itching to prove they “still have it,” entrepreneurs may see financial advisors as somehow less successful people whose advice they do not need.
At that moment, the confidence bred from a lifetime of success becomes their enemy instead of their friend. The lack of advisors holding them back tends to produce more and more risk. All too often, the results are, again, catastrophic.
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4. Failing to distinguish creating wealth from preserving wealth
Most entrepreneurs do not understand that running a business and making long-term investments require entirely different skills and approaches.
To build a business, you input not just capital but also intellect and labor. Usually, there’s a direct relationship between the amount of intellect and labor you put in and the wealth you take out.
This relationship is just the opposite when it comes to investments. Research has shown that the more activity you put into your investments, the worse results you usually achieve.[1]
Market timing and stock picking are usually just bad ideas. So are the most sophisticated algorithms and strategies. Usually, you would have done better buying a basket of stock and bond funds and holding them for the long term. [2]
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5. Not recognizing the limits of mental energy
Mental energy is a scarce resource and probably our most precious resource. This resource gets used up during the day. Studies have shown that humans are capable of making about 10 good decisions in a day, maybe fewer. If we use up that capacity, we begin to make bad decisions.
As our mental energy becomes exhausted, we begin going on instinct or reflex. In other words, we don’t think about our decisions sufficiently because we just don’t have the mental energy to think.
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5. Misunderstanding the function of goalposts
Entrepreneurs are extremely goal-oriented people. Their business goals are tangible and solid: growth, revenue, profit. They think that if they could just reach those goalposts, they’d be happy. Then they’d take time to relax and enjoy family life.
But outside of a sports field, goalposts become tricky. They keep moving farther down the field as you approach them, and they never quite get reached. That means that waiting to achieve any particular goal before you “have time” for happiness, family, and your health will always be a losing game.
Indeed, the best entrepreneurs have learned that happiness and health tend to be preconditions for a successful business life. Certainly, they make success easier to reach.
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7. Over-identifying with the business
Along with offering goalposts, business offers a structure for time, relationships, and personal identity. Like so many other aspects of the entrepreneurial life, this structure presents you with another double-edged sword.
If you go to work at seven, have lunch with your coworker at twelve, and then stay in the office for another two hours after your employees leave at five, you have fully organized your life around your business. It’s likely that when you get home at 7:30 pm, you will lapse into atrophy. You will read the newspaper or watch TV and avoid conversation with others. After all, you’ve been talking to people all day long!
It’s all too easy for this rhythm to become your very life and, worse, your identity.
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8. Not accepting the facts of aging
Entrepreneurs can be overconfident about a lot of things, including the longevity of their business acumen. Your skills and the currency of your knowledge will decline over time. No one escapes this reality.
The decline in competency over time is simply a reality of human life. Studies show that somewhere between fifty-five and sixty, our mental capacity begins to decrease—increasing the odds that we will make mistakes. By our seventies, the decline is serious.
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9. Not planning for retirement
People who work as employees often end up having more comfortable retirements than high-flying entrepreneurs. That’s because employees are often encouraged to secure their retirement through 401(k) plans, pensions, and the like. In other words, someone else is forcing them to think about retirement and do some planning.
Entrepreneurs, on the other hand, are on their own. Not only are they overconfident about their ability to handle the financial realities of retirement, but as we have seen, saving for retirement usually happens only as an afterthought. Often, they’ve staked everything on their business.
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10. Mixing personal & business finances
Enterprise entrepreneurs rarely make this mistake, but their cousins, the lifestyle entrepreneurs, often tend to mix their business and personal finances in a way that endangers the preservation of their personal wealth, creates unlimited liability, and may make a business exit impossible.
The best way to ensure an adequate separation of accounts, accounting, budgeting, and savings is to always be thinking toward an exit. When you plan for an exit, you automatically begin creating policies and procedures, along with the financial structures to enable wealth beyond business.
By staying aware of these 10 challenges, you can avoid many of the pitfalls suffered by entrepreneurs before you.
[1] Brad M. Barber and Terrance “Terry” Odean published a famous study, “Trading is Hazardous to Your Wealth,” Journal of Finance, Vol. 55, no. 2, (April 2000). The authors note, “Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that traded most earned an annual return of 11.4 percent, while the market returned 17.9 percent.”
[2] Simply holding diversified baskets of stocks for the long term is advocated by savvy investors like Warren Buffett and Jack Bogle. See, for example, Kathleen Elkins, “Warren Buffett and Jack Bogle Agree on the Formula for Long-Term Success: ‘Buy and hold,’” CNBC.com, September 18, 2018.
This article is adapted from the book Entrepreneur Wealth Management Made Easy by Michael Zhuang and syndicated by MediaFeed.org. Michael is the founder and principal of MZ Capital Management, which he has run for the past 14 years. He holds dual master’s degrees in mathematics and quantitative finance from Carnegie Mellon University.
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