Asset allocation for self-employed, independent contractor

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
MJW
Posts: 665
Joined: Sun Jul 03, 2016 7:40 pm
Location: Pacific Northwest

Asset allocation for self-employed, independent contractor

Post by MJW » Fri Apr 13, 2018 2:03 pm

This question is geared primarily to those of you that are independent contractors with no employees and your self-employment is a significant (or main/only) source of your household income.

I am interested to hear how you view your business and your human capital in terms of investment risk. Do you take a more conservative approach to asset allocation than you would otherwise? Do you hold a greater amount in cash/short-term assets? Let’s assume relatively low overhead and put aside funding/reserves for the business itself and focus on the idea of saving and building personal wealth.

Thank you in advance for your replies.

MJW

MJW
Posts: 665
Joined: Sun Jul 03, 2016 7:40 pm
Location: Pacific Northwest

Re: Asset allocation for self-employed, independent contractor

Post by MJW » Sun Apr 15, 2018 11:24 am

Bumping this for the Sunday crowd.

User avatar
nedsaid
Posts: 10680
Joined: Fri Nov 23, 2012 12:33 pm

Re: Asset allocation for self-employed, independent contractor

Post by nedsaid » Sun Apr 15, 2018 11:38 am

MJW wrote:
Fri Apr 13, 2018 2:03 pm
This question is geared primarily to those of you that are independent contractors with no employees and your self-employment is a significant (or main/only) source of your household income.

I am interested to hear how you view your business and your human capital in terms of investment risk. Do you take a more conservative approach to asset allocation than you would otherwise? Do you hold a greater amount in cash/short-term assets? Let’s assume relatively low overhead and put aside funding/reserves for the business itself and focus on the idea of saving and building personal wealth.

Thank you in advance for your replies.

MJW
Business is volatile. You will have great times and slow times. What I would do is hold a greater amount in cash and short term assets to protect you during times when business is slow.

If you have a business, you want liablity protection. That is if you get sued, your losses are restricted to the amount you have in the business. You want something like a corporation or a limited liability company to keep a lawsuit from hitting your personal wealth. You also want omissions and errors insurance for your business and an umbrella policy as part of your personal insurance plan.

Another thing, you hear the conventional wisdom to keep reinvesting in your business. Actually what smart businessmen do is that they take money out once it enjoys success. You don't want everything you own tied up in your business, you want personal assets as well.

People take it for granted that you can sell your business when you retire, I will just say that this is not always possible. There are also pitfalls to selling your business and it is something that necessitates good advice. You want the documents to be in good order legally and you want to be sure you get a fair price and conditions of sale.
A fool and his money are good for business.

MJW
Posts: 665
Joined: Sun Jul 03, 2016 7:40 pm
Location: Pacific Northwest

Re: Asset allocation for self-employed, independent contractor

Post by MJW » Mon Apr 16, 2018 11:26 am

I appreciate the response, Ned. My strategy is to hold a higher cash allocation but I'm interested to know what others are doing as well.

xenochrony
Posts: 53
Joined: Mon Mar 26, 2018 11:24 pm
Location: California

Re: Asset allocation for self-employed, independent contractor

Post by xenochrony » Mon Apr 16, 2018 2:01 pm

I am a self-employed independent contractor where future job security is very low and income can be lumpy. I have been in this situation for the last 9 years. I do not consider the cash on hand as part of my AA. As such, my business situation does not impact my investment risk (AA) at all as I do not factor my EF into my AA. My EF is substantially large due to the future unpredictability of my business/business income. This helps me SWAN (as does derisking with appropriate insurance products [mentioned above]).

xenochrony

gr7070
Posts: 200
Joined: Fri Oct 28, 2011 10:39 am

Re: Asset allocation for self-employed, independent contractor

Post by gr7070 » Mon Apr 16, 2018 3:15 pm

xenochrony wrote:
Mon Apr 16, 2018 2:01 pm
I do not consider the cash on hand as part of my AA. As such, my business situation does not impact my investment risk (AA) at all as I do not factor my EF into my AA.
This. Disassociate the two.

Determine how large a professional "EF" you require and allocate that appropriately - mostly cash.

Then allocate your personal retirement assets according to your needs, risk tolerance, and modern portfolio theory.

Both of these are done, essentially, like everyone does. Just the amount of the EF will be far larger than the typical employed, since it includes your business' working capital more or less.

You could disassociate your personal EF from working capital, too. However for a sole proprietor those waters are likely far more muddy.

WhyNotUs
Posts: 1358
Joined: Sun Apr 14, 2013 11:38 am

Re: Asset allocation for self-employed, independent contractor

Post by WhyNotUs » Mon Apr 16, 2018 5:11 pm

Have been self-employed all of adult life. I keep six months expenses in local bank and invest other funds just like anyone else- asset allocation based on age and risk profile. My form of employment is only really relevant in having a little more latitude in amount to put into retirement each year based on changes to income compared to someone with more predictable income. Only work 1/2 time now so it is not much of an issue but during peak earning years it was more dynamic.

If your question is do I invest differently due to be self-employment, the answer is no.
I own the next hot stock- VTSAX

Post Reply