One of the top questions for business owners looking for solid investment strategies is: “Why are you in business?” That question, said Brian Loy, president, Sage Financial Advisors, applies both to why business owners get out of bed in the morning, and to one of the reasons for running a business; to make money.
The answer to the question becomes one of the three legs of a three-legged investment stool. Financial planning that is sound and stable and doesn’t tip over unless one of the legs is shorter than the other, or missing.
“The concept of the most affluent people I’ve met, they’ve built their wealth on three legs, which are their business-slash-real estate, their retirement assets, tax deferred like 401K’s and the third leg is after-tax investing, like in their trust,” said Loy. “You’re not only diversifying your investments, but you’re also diversifying the income tax ramifications of how you’re drawing that money from down the road.”
The next part of investing is knowing what your number is. “Unless people want to get carried out on their shield, they don’t want to work forever,” said Loy. So, the number one question is, “How much money do we need to maintain our desired standard of living?”
Businesses provide two things to owners, financially speaking. They provide profits to live off of and save, and an exit strategy when sold. However, that may not be the whole story anymore. Because the pandemic, said Loy, made people think.
“As business owners, we’ve seen these big challenges, how supply chains have been interrupted, how hard it is to get labor, and the challenge of restarting businesses now,” said Loy.
The pandemic changed how people invest. And how they want to invest. “They want to do things simpler,” said Loy. “They want to declutter their lives, figuratively.”
One fairly simple investment strategy is to run personal finances the same way the business finances run. Businesses have strategic plans, budgets and contingency planning.
“Do something similar with your personal finances,” said Loy. “Have a plan and a team of trusted advisors that will provide you a roadmap for your future. Periodically check in so that you can make adjustments and make sure you’re on track, because things change, whether that’s life or market conditions.”
Strategies for investing aren’t static. What was good advice once may not apply anymore. Once investors were expected to invest more conservatively as they aged. The Rule of 100 sought to simplify asset allocation. Investors subtract their age from 100 and that’s the percentage that should be in stocks. “So, if you’re 40, you should have 60 percent of your money in stocks, 40 percent in bonds. If you’re 60 you should only have 40 percent in stocks,” said Loy. “Invest more conservatively as you grow old. But that’s not always right.”
One pandemic-related change is rising costs of everything from the value of a home to the cost of a sheet of plywood. Shipping costs have tripled and getting anything from Asia to the West Coast is a challenge. “So, it’s really important for us to start taking a front footed investment approach, given the concerns of higher taxes, inflation, interest rates and higher prices,” said Loy.
Yet investors are told because of current inflation, now’s the time to invest in inflation-proof assets, like gold or real estate. “But how anxious are you to buy another rental property at today’s prices, which are sky high,” said Loy. “And the challenge with owning gold is it doesn’t pay you any dividends.”
Instead, Loy advises staying focused on having a diversified portfolio that includes real estate and gold. That way the portfolio can provide a steady paycheck in retirement, one that gives pay raises for rising living costs and won’t be outlived but can be passed on.
“The value and the beauty of having diversification is this tradeoff that we all see in investing,” said Loy. “We’re never going to make a killing, but we’ll never get killed.”
New Kids on the Block
During 2020, when it felt like the economy was in free fall, a curious thing happened: A record 4 million new businesses started up in the U.S.
How many of those businesses were started by people who know how to run a business, and how many will survive remains to be seen. It’s a good idea for new business owners to invest in learning to run a business, but there’s also 4 million new business owners who may choose to invest.
Different businesses invest differently; so do different sized businesses. Internally, businesses have different investment needs and business owners need different levels of liquidity needs depending on the economic environment, said Randy Garcia, CEO, Investment Counsel Company. “When times are bad, liquidity dries up and people who thought they could get their hands on their money find out unfortunately that they can’t, or they can’t within the time frame needed. Hardly ever does anyone have too much cash in bad times. They all find themselves short to some degree.” The amount of liquidity needed short-term or long-term can determine how a business invests.
“Typically, similar companies in a similar industry are going to approach decisions similarly, but they can be different sizes, they can have different geographies that they target,” said David Garcia, executive director, office lead, JP Morgan Chase. Decisions being made on such opportunities should be discussed with a financial advisor or team. “Because every company is going to think of it differently. MGM is going to think of it differently from Caesar’s even though they’re the same industry they’re going to think of it differently because they’re different companies.”
The last year brought not only new trends in investing, but also new cryptocurrencies. That doesn’t mean financial advisors and wealth managers are suggesting anyone invest in them.
“Cryptocurrencies are a type of money that differ from traditional currencies in that they are digital in form and not issued by a government or backed by a scarce asset,” said Paul Johnson, Nevada president, Northern Trust Wealth Management. “They use block-chain coding systems to store, transfer and validate transactions. We do not believe cryptocurrencies qualify as a risk asset or risk control asset, and do not have a role as an asset class in a prudent long-term investment portfolio.” Johnson said Northern Trust, which constructs client portfolios from risk control and risk asset building blocks to ensure robust diversification, believes cryptocurrencies should be considered similar to other assets such as collectibles and art, which may have special value to their owners.
“Cryptocurrencies remind me of the automotive industry and/or the railroad industry going back a hundred-ish years,” said Randy Garcia. “There was money to be made and a lot of money to be made from an investors point of view, but very few or not many made money.” At the time there were hundreds of auto manufacturers and more than 100 railroad companies. But those numbers were swallowed up by massive consolidation, the same thing that happens today, and typically the public failed to make money off those types of opportunities.
Large purchasers and governments don’t want a currency that’s hyper volatile. That’s one reason cryptocurrency is considered in very early stages. Randy Garcia expects it will take on many shapes and forms as the bugs are ironed out and it’s in a consumer useable form, and definitely before it’s ever considered the wave of the future. That’s partly because governments like China aren’t interested in the benefits this form of cryptocurrency offers. “They want to be able to control all that money and where it goes,” he said.
That’s in direct conflict with the stated aims of cryptocurrencies, and one of the reasons the currency dropped 50 percent. It was originally marketed as a currency that couldn’t be tracked by governments. That turned out to be false, especially when a recent scam involving cryptocurrency was taken down by the FBI which had no problem tracking the currency and the people involved. Cryptocurrency’s time may come, but it hasn’t come yet.
Like the name implies, they swoop down and meet with young companies that have exhausted capital and loans from friends and family and need funding. At forums or meetings in angel networks, interested investors meet with presenting business owners, review business plans, do research and due diligence, and decide whether to invest.
Advantages for angel investors is they’re predominantly investing in industries outside their core business. That helps diversify their portfolio. Angel investors normally look for a 35 to 40 percent internal rate of return.
“That’s a high return, but there’s also high risk,” said Tarby Bryant, founder and chairman, Gathering of Angels. “Angel investing works out some of the time, not all the time. I encourage members of Gathering of Angels not to put all their eggs in one hot basket they believe is going to be the best thing since Tesla Motors. Having a diversified portfolio makes a lot of sense because some [young companies] will go up and some will go down and several of them will become what I call walking wounded–they’re alive but they’re not really prospering.”
Like other investment strategies, angel investing follows trends. A hot investment today might not be hot in another month. The pandemic and resulting recession, and the 2008 recession, both changed the way angel investors look at investment opportunities.
“Once upon a time I would have meetings in Santa Fe where I started Gathering of Angels 25 years ago,” said Bryant. “People would bring their checkbooks and if they saw something they liked they’d write a $50,000 or $100,000 check and not really worry about it, because it was all going to go well, they thought.”
The 2008 recession made people more skeptical of any kind of high-risk investment. They do more research and due diligence before writing a check. They attend meetings and often co-invest with other investors who have expertise in the area, or with whom they’ve invested before.
Since 1996, Gathering of Angels has done 420 fundings for seed and early-stage companies, ranging from $20,000 to $38.5 million.
“The new trend really is – and this is debatable – the Federal Reserve of the United States, our central bank, takes the position that our economy into the long term or distant future will remain deflationary,” said Randy Garcia. “In other words, the economies of inflation today that were caused and still are being caused by COVID are temporary and they feel that longer term deflation is the bigger of the two risks. There’s also a second opinion that inflation will either rise more than the Federal Reserve thinks or persist longer than the Federal Reserve thinks. Or both.”
Which means investment strategies are trending for a declining interest rate environment, and investment strategies used for a declining interest rate environment are going to be very different than investment strategies used for a rising interest rate environment, which is different from one that is staying within a limited range. “It’s going forward, going backward, versus being in neutral in a car,” said Randy Garcia.
There are investment trends, and the trends have been influenced by COVID. Investment megatrends post-pandemic include healthcare, David Garcia said. With medical companies able to produce a vaccine within a year, they’re starting to extrapolate the process with other mNRA vaccines and other R&D healthcare areas.
Healthcare data is another investment megatrend. “Data is everywhere and AI helped with innovation in healthcare. Given the nature of the pandemic, we’re seeing shifts in the way healthcare and biotech industries are looking at the future of their respective industries,” said David Garcia. “With what we saw, we’re really optimistic about medical companies like Pfizer and BioNTech, all the companies coming up really quick with strong vaccines and scientific development. We see that continuing, if not accelerating.”
Regardless of how individuals feel about it, environmental, social and governance (ESG) is on a lot of investor’s radars. The Biden administration’s policies are moving toward alternative fuels. States like California and New York are leading the charge for a sustainable future. Companies are starting to focus on how goods are sourced and where they come from.
“Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities,” said David Garcia. “In the past it was like, ‘Let’s invest because it’s a good thing to do morally.’ But now it’s starting to make good financial sense. Before it was just, ‘Why am I going to do that just because it makes somebody happy?’ Now it makes financial sense, so it’s more like ‘Why wouldn’t I do it?’”
For businesses and business owners, now’s the time to find deals, harness megatrends, and diversify through the recovery, said David Garcia. “Because it’s going to be bumpy as we start to take away some of the stimulus and the unemployment benefits start to phase out in December and different things start to happen. It’s a really good opportunity right now to get one’s finances in better order for whatever may come, and rates will most definitely be increased in the next couple years and as they are increased, business owners have the chance of being in the best position to have lowered cost of capital debts.”