In June of 1812, French Emperor Napoleon Bonaparte controlled more of the European continent than anyone since the Emperors of Rome. That month, he crossed the river Niemen into Russia. It was to prove the most fateful decision of his illustrious career. Disease, scorched-earth tactics, logistical problems, desertion, and the infamous Russian winter utterly decimated the Grande Armée over the next six months. Emboldened by the losses, Napoleon’s enemies overwhelmed his army the following year, forcing him into exile in 1814.
Dozens of lessons could be drawn from this episode but let us focus on just one: building an empire does not always mean keeping it. Translating that to business: getting rich is one thing; staying rich is another.
Whereas Napoleon was forced into retirement, business owners typically have far more leeway in determining the timing and terms of their own exit.
After the sale of a company, the business owner’s “empire” is effectively transformed from a stake in a private business to liquid securities—cash, bonds and shares of publicly-traded stocks. Unfortunately, some business owners succumb to the various risks of an investment portfolio.
Mistake #1: Insufficient Diversification
After spending years focusing on one company, it is natural for former business owners to adopt a similar approach to their liquid investments. That is, they may be inclined to take concentrated positions in a handful of companies whose industry and products make sense to them. But if a big position goes south, it is often too late in their life cycle to recover from the loss. The capital has been permanently impaired.
Mistake #2: Overtrading
Some retired business owners are too hands-on when managing their portfolios, obsessing over price movements throughout the course of the day. Feeling a need to “do something,” they trade their accounts excessively, creating both imbalanced exposures and unnecessary tax costs.
Mistake #3: Excessive Cash & Bonds
Some retired business professionals, who prefer the comfort of cash and bonds to the loss of control they feel with stock price fluctuations, often question, “Why own shares of any business when I’m not managing it?” However, in a time when the Federal Reserve is squeezing bondholders with near-zero interest rates and higher inflation, short-term market corrections are the inescapable cost of maintaining long-term purchasing power.
Napoleon did not actually start many of the wars he fought, but two of the wars he did start brought his downfall. Whether you are managing Continental Europe or your portfolio in retirement, you should avoid taking large risks when it is unnecessary.
About James Adams, CFA, CFP® and BSSF Wealth
BSSF Wealth is a fee-only financial planning firm headquartered in Camp Hill, Pennsylvania, with additional office locations in Hanover and Lancaster, as well as Frederick and Westminster, Maryland. BSSF Wealth is a Member of Advisory Services Network, LLC.
James Adams (“Jimmy”) is a Private Wealth Advisor at BSSF Wealth, which he co-founded in partnership with Brown Schultz Sheridan & Fritz (BSSF). He has two decades of financial services experience with expertise in asset allocation, portfolio analytics, financial planning, and investment manager selection. He is also the author of Waffle Street, a memoir of his time spent at a Waffle House in 2009 after the market collapse in the Global Financial Crisis. The book was later adapted into a feature film of the same name, starring James Lafferty and Danny Glover.
Disclosures: Investment Advisor Services offered through BSSF Wealth, a member of Advisory Services Network, LLC. Tax preparation services offered through Brown Schultz Sheridan & Fritz. Advisory Services Network, LLC and Brown Schultz Sheridan & Fritz are not affiliated. Advisory Services Network, LLC does not provide tax advice. The views expressed herein are those of BSSF Wealth and not necessarily those of the Advisory Services Network, LLC. This material is for informational purposes only and does not give personalized investment or professional advice. This is neither a solicitation, nor a recommendation, to purchase or sell an investment and should not be relied upon as such. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law or any other matters that affect you or your business. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment loss. As with any investment strategy, there is the possibility of profitability as well as loss. The strategy discussed above is for illustrative and educational purposes only and should not be construed as an endorsement, recommendation or solicitation to buy or sell any particular security. Options involve risk and are not suitable for all investors. Certain complex options strategies carry additional risk. Please read the options disclosure document titles Characteristics and Risks of Standardized Options by clicking on this hyperlink text https://www.theocc.com/about/publications/character-risks.jsp before considering any options transactions. Covered calls provide downside protection only to the extent of the premium received and limit upside potential to the strike price plus premium received.