Should You Start a Business?
Let’s review our asset class comparison chart and see how the business asset class stacks up to paper and real estate.
Unlike the stock market and many real estate investments, starting a business or investing in one is clearly not a set-it-and-forget-it approach.
There are some major upsides—which of course, come with major downsides, too. We broke down each of the pros and cons to better understand how business assets can fit into our portfolios.
Pro: Opportunity for Massive (and Passive) Income
Investing in or starting a business comes with the opportunity to create the gold standard for building wealth (cue the Hallelujahs): passive income! Investing in or starting a business that you can eventually extricate yourself from is one incredible way to achieve financial freedom earlier than most people. 65% of the people on Forbes’ Wealthiest People made their fortunes through entrepreneurship—not through the stock market or real estate investing. Even if you don’t have billionaire aspirations, it just goes to show that owning a business can fast-track your way to serious wealth.
Con: High Barrier to Entry
Starting a business, as you know, is no easy feat. There is a lot involved—it requires a business idea, a business plan, a lot of time, capital, etc. Because of this, it has a very high barrier of entry compared to the paper and real estate asset classes. If it didn’t, you’d probably see a lot more of your friends starting businesses.
“...my greatest rewards have been the people and the relationships...The money has been an accident. I mean, it’s a good accident...”
Pro: Rewards Beyond Returns
Ray Dalio claims that his greatest rewards from starting his business have been the people and the relationships he’s made...and that the money was a byproduct. Ray started his business in a small apartment..now, he’s a self-made billionaire.
Starting a business isn’t glamorous, but we’d bet most founders would agree that the experience of building something from scratch, and all the people you meet along the way, are priceless.
Con: It’s Not Very Liquid
Businesses are not liquid investments. Because your money is tied up in your product, your people, or your services, you can’t just pull money out whenever you need it, like you can with the stock market. Starting or investing in a business usually comes with a very long tail return—and that is if you see a return at all.
Pro: There is No Ceiling
Unlike working at a major corporation, there are no salary bands, raise negotiations or other bureaucratic bullshit to work through in order to get paid more. If you own a business, there’s logistically no ceiling to the amount of money you can make. You have an opportunity to create huge wealth for you and your family—possibly for multiple generations.
Con: There is No Floor
However…the majority of businesses fail (only 25% of new businesses make it to 15 years or more), which makes it the riskiest asset class. And because there is no ceiling, that also means there’s no floor—which in turn, means you could lose all of your wealth in the process if you’re careful or strategic.
We’re all about diversification, but investing in the business asset class isn’t for everyone. We spend an entire session of the Wealth Circle (Session 5) reviewing ways to get creative and strategic with business investing. So if your interest has been piqued…