I’m a big fan of diversification. It helps keep me sane in the roller-coaster life I live and love.
Many individuals suffer from under-diversification (they’re too concentrated on one specific venture). Successful entrepreneurs like Reid Hoffman, for instance, balance out their under-diversified status through angel investments. Unfortunately, not all individuals are successful entrepreneurs–and most can’t afford making quarterly investments between $100-250k.
I’ve gathered some data from four primary sources: (i) Gentry and Hubbard’s Research on Entrepreneur Savings, (ii) Heaton and Lucas’ Analysis on Diversified Entrepreneurs [pdf download], (iii) Moskowitz and Jorgensen [pdf download], (iv) Heaton and Lucas’ Private Equity Premium
Diversification Statistics from Entrepreneurs:
- Entrepreneurs’ portfolios are less well diversifed
- Entrepreneurs hold less wealth in liquid assets, bonds, public equity and real-estate
- Entrepreneurs allocate most of their wealth to business assets and commercial real-estate (owning offices)
- 75% of all private equity is owned by households for whom it constitutes at least half of their net worth (excluding human capital)
- Portfolios of entrepreneurs grow less over time
- Wealthy entrepreneurs have a portfolio share in bonds and equity that is half that of wealth non-entrepreneurs
- Entrepreneurs borrow at a heavier rate than other individuals
Bottom line: Entrepreneurs are under-diversifed.
{ 4 comments… read them below or add one }
Scott, what would you suggest as a solution. I know the obvious answer is diversify…but along which axis?
Good question — There’s only two things you’ll need to diversify in life: money and time.
I did the following about three weeks ago: List out what you’ve invested money into and time into.
For example:
Money:
- Stocks: Finance sector, Technology sector, Manufacturing sector, Food/Goods, Media
- Cash: Savings and checking
- Jewlery: [I view as a sunk cost]
- Car: Repairs
- Food: Another sunk cost
- Appt: Rent
Time:
- Relationship: Wife
- Career: Main job
- Blog: Posts
- Reading: Pleasure, research
- Browsing Internet
After you make a list, look at the primary driver in each area and diversify it. For example, if you only held investments in stocks, find another investment pool. If you have zero side-projects, tack one on that doesn’t take up much time. If you’ve been reading only finance books, pick up a literary classic.
There are a couple of groups trying to solve this issue:
SharesPost: a start-up being incubated by Brighthouse (www.brighth.com). The platform will provide liquidity to founders and angels of top venture backed companies.
The Founders’ Club (www.founders-club.com): a newly formed group that provides liquidity options for Tier 1 VC-backed company shareholders.
Randy — nice share. I think this only helps the rich get richer, and the bootstrapped remain under-diversified, though. Can you elaborate a bit on the models?