In 2015, I force-fed my business cash. $480,000 per year on office rent, $500,000 on a mobile app, $500,000 on a custom community, $1 million on a marketing campaign, much more hiring too many people. My company couldn’t digest the money. Million of dollars, evaporated.
In 1972, Warren Buffett and Charlie Munger bought See’s Candies. Despite having ample cash, the investors struggled to expand the business beyond California. Rather than force See’s to reinvest more, Buffett and Munger invested the cash it produced in other businesses. Last year, one of the companies they invested in with See’s cash flow—Coke—paid them $776 million in dividends.
Your Portfolio’s First Investment
In 2019, I acquired 40% of an ecommerce business, Lifeboost Coffee, with sales of $213,346 in 2018. The following year, we grew sales to $2.7 million. If your business is growing fast, first invest in your own company.
However, all businesses—our company included—reach a point at which returns on reinvested cash diminish. Like Buffett and Munger, invest elsewhere.
Investing Outside Your Business
I made my first million at age 25. I bought three investment properties—single family homes in Austin, Texas—for around $300,000 each. All went well, at first. I received a letter from a home owner’s association (HOA)—our renter left a trashcan out too long. Another renter left after a year, so we had to re-list and re-stage that property. We paid real estate agents, stagers, accountants, and lawyers to maintain these investments. I wanted to grow my wealth, not manage another business.
Less than two years later, I sold all three houses. I invested in an asset with better returns and far less work.
A 100% Passive Investment
The best investment outside your business is diversified group of leading companies. Over a long period of time—with low risk—you double your money every 7 to 10 years.
A S&P 500 index fund is a single investment through which you indirectly own shares in the largest 500 publicly traded companies in the United States. As those businesses grow sales, produce cash, pay dividends, and buy back shares, your wealth grows.
Which Index Funds?
There are over 150,000 funds available. You can invest in international companies, smaller businesses, larger businesses, dividend-paying companies, specific industries—such as pet care—and thousands of other segments of the world’s economy through index funds.
Shop for funds like you shop for screwdrivers—good quality, low prices, only a few.
The 90/10 Portfolio
Outside your business, you can compound your wealth with just two investments: 1) 90% in a S&P 500 index fund and 2) 10% in a short-term U.S. treasury fund. You invest in 500 of the best companies in the world and preserve 10% of your cash with ultra low-risk loans to the U.S. government (treasuries). Warren Buffett, in response to a question about how he’d recommend investing his cash for his wife were he to die unexpectedly, recommended this portfolio.
Many argue against it. The main risk is that almost all your investable assets are in large U.S. companies. That group of stocks, however, is likely to produce the best returns over periods of at least 10 years.
Pros of the 90/10 portfolio:
- Simplicity.
- Includes a high concentration in the asset—stocks—likely to produce the best long-term returns.
- Safely preserves 10% in low-risk, easily sellable U.S. government loans.
Cons of the 90/10 portfolio:
- Concentrated in one market segment—large U.S. companies.
- Risk of significant—likely temporary—declines in value.
- Large U.S. companies are unlikely to perform as well as they have in the recent past.
Recommended funds:
- Vanguard’s S&P 500 ETF (stock ticker: VOO)
- iShares Short-Term U.S. Treasury ETF (stock ticker: SGOV)
The Three-Fund Portfolio
A second, less concentrated option, popularized in The Bogleheads Guide to the Three-Fund Portfolio by Taylor Larimore, is the three-fund portfolio. It includes a wider selection of U.S. stocks, international stocks, and corporate bonds.
The three-fund portfolio includes:
- A total international stock index fund
- A total bond market index fund
- A total U.S. stock market index fund
With three funds, you invest in 3,609 U.S. company stocks, 8,533 non-U.S. company stocks, and 11,277 investment-grade bonds of U.S. companies. This portfolio provides strong appreciation potential with low long-term risk.
Larimore says your allocation between the three portfolios is based on your risk tolerance and age. As a starting point, he suggests 20% in the total international stock index fund, your age as a percentage in the bond market index fund, and the remainder in the U.S. stock market index fund. For example, a 40-year old’s portfolio could include:
- 20% in a total international stock index fund,
- 40% (40 years old = 40%) in a total bond market index fund, and
- 40% (100%-20%-40%) in a total U.S. stock market index fund.
Pros of the three-fund portfolio:
- Wide diversification.
- Simplicity.
- The bond fund likely provides some downside protection against stock market declines.
Cons of the three-fund portfolio:
- In the recent past, international stocks, bonds, and small capitalization stocks have significantly underperformed large U.S. stocks; should that continue, this portfolio will underperform the 90/10 portfolio.
- The total bond market index is more volatile than a short-term U.S. treasury bond fund–therefore it’s less protective of cash needed in emergencies.
Recommended funds:
- Vanguard Total International Stock ETF (stock ticker: VXUS)
- Vanguard Total Bond Market ETF (stock ticker: BND)
- Vanguard Total Stock Market ETF (stock ticker: VTI)
Choosing Your Portfolio
Larimore’s book includes a table which shows the average annual return and worst single year return between 1926-2015 of portfolios consisting of various allocations of stocks versus bonds. Here’s a similar table from Visual Capitalist:
To produce the best long-term return with your portfolio, invest more with stocks—as long as you can deal with significant short-term declines. If you can’t, include a higher portion of cash or bonds.
Dr. Jim Dahle of White Coat Investor published an article—one of his most popular—covering 200 portfolio constructions. His goal was to clarify that what matters most in an investor’s portfolio is applying the fundamentals and sticking to a plan—not creating the perfect portfolio. A fundamentals of a good portfolio are:
- It is well diversified
- It includes mostly stocks
- It is preserves some portion in cash or low-risk bonds
Is Now a Good Time to Invest?
The investors—with multi-decade track records—that I admire don’t try to predict short-term stock market changes. They are somewhat more cautious when prices are historically high and somewhat more aggressive when prices are historically low. In his January 7th, 2025 memo titled “On Bubble Watch”, billionaire investor Howard Marks concludes with, “the markets, while high-priced and perhaps frothy, don’t seem nutty to me.” That’s as concrete of a prediction the world’s best investors can offer.
Spread your investments out over multiple years; for example, invest 1/48th each month over four years. It won’t be catastrophic if you start investing in an overvalued market. When prices are high, your cash buys less; when prices drop, your cash buys more. This is called dollar-cost averaging.
With a diversified portfolio built over many years, you will do quite well as long as you remain invested through stock market declines and patient while your money compounds.
What if You Want to Invest in Individual Stocks or Businesses?
Imagine we have two investment options. Both produce $100 in cash flow per year for 10 years starting one year from now. After that time, both are worth zero. The first option, let’s call it Herkshire Bathaway, grows 8% per year and is available for $500. The second option, Desla, grows 30% per year and is available for $2,800. Which is a better investment, the slow-growing Hershire Bathaway, or the fast-growing Desla? Assuming a 6% discount rate, the present value of Herkshire Bathaway is $1,028, and the present value of Desla is $2,791. With the former, you can buy it at half its value ($500 versus $1,028); to purchase the latter, you pay more than the present value of its future cash flows ($2,800 versus $2,791). A company that grows fast, makes exciting products, is led by a charismatic CEO, and has a skyrocketing stock price can be a bad investment—if you pay too much.
It’s easy to find well-known businesses with superb products and a bright futures; it’s hard to gauge whether or not such businesses are good investments. It’s like sports betting: you can know the team most likely to win, but be less clear on which team to bet—if the gambling odds are 3-to-1. Many new investors assume if they buy shares in a recently appreciated–and often exorbitantly priced–stock, they can resell it at a higher price in the future—to a greater fool.
No asset grows to infinity. What was once a great investment becomes a lousy one at too rich a price. Microsoft’s market value today is greater than three trillion dollars. Had you bought its shares in January of 2000, you would have had to wait 15 years—assuming you didn’t sell after the 50% decline—before making a profit.
In the long-term, business performance—especially cash flows–determines stock price. Buying something because its price has increased, is gambling, not investing.
Before investing in an individual stock—or anything else other than a diversified index fund—you must know its intrinsic value. Estimate how much cash the asset will produce over its lifetime and when. Discount those amounts by a reasonable rate–such as 6%–to calculate the present value of those cash flows. Only invest if the value you calculate is at least double the current price. Good investing is buying dollars for 50 cents.
Set aside any investment for which you’re unable to calculate its cash flows for the next 5 to 10 years into what Warren Buffett calls the “too hard pile”. (He literally has a basket on his desk with that label.) Wait for the sure bet. Even Benjamin Graham, Buffett’s teacher and the godfather of value investing, made most of his returns from one investment, GEICO. Only invest if 1) you’re confident you can predict future cash flows and 2) there is a significant difference between the value you’ve calculated and the price at which you can invest (referred to as a “margin of safety”).
5 Steps to Financial Independence for Business Owners
Think like an investor—and invest well—to create financial independence and abundance. Follow these five steps:
Step 1: Save 10% of business earnings. Before investing, improve your business. Profit margins vary by industry, yet a 10% net profit margin is achievable for almost all small businesses. Reduce costs and grow sales until you achieve this minimum profit level. (Read—and apply—the lessons in Bob Fifer’s book, Double Your Profits: In Six Months or Less.)
Step 2: Pay off high-interest debt. The average credit card interest rate is 24%–even Warren Buffett hasn’t produced that high of a return. Pay off credit cards and any other high interest–greater than 10%–debt before investing. Consider canceling your credit cards and paying with cash (including debit cards) going forward.
Step 3: Build a $1 million dollar safety portfolio. Outside your business, save and invest $1 million dollars in a well-diversified portfolio such as the 90/10 portfolio or three-fund portfolio. While 4% of $1 million ($40,000) likely isn’t enough to cover your lifestyle expenses, it’s a start. You’ll begin to feel relief that your whole livelihood isn’t dependent on your business.
Step 4: Build a concentrated investment portfolio outside your safety portfolio. You don’t need to invest in individual stocks or other assets to build wealth. However, as an entrepreneur, you may want to invest outside of index funds. Invest no more than 15% in your concentrated portfolio until you’ve proven yourself as a competent investor over three to five years. This portfolio can include other small, private businesses you invest in. As with public stocks, value all other individual investments the same way—by estimating future cash flows. (Track the performance of your concentrated portfolio to keep yourself honest. If you can’t beat the market over multiple years, stick with index funds because you’re wasting your time.)
Step 5. Save 25X your annual living expenses outside your business. Once your investments can pay for your living expenses, you’re free. Aim to build an investment portfolio outside your business with 25 times your annual living expenses. Over the long-term, a well-invested portfolio continues to appreciate; you can sell 4% of its assets each year and likely live off that for the rest of your life. As an entrepreneur, you’ll find other ways to make money. Having enough safely invested to cover your life frees you to live and prosper with a life unique to yourself.
The Independent Entrepreneur
Jeff Bezos, Mark Zuckerberg, Sara Blakely, Bill Gates, and many others all built the majority of their wealth with single businesses. You don’t need to invest outside of your company if, like Bezos, you own 9% of the $2.5 trillion Amazon. Amazon is unlikely to fail; even with a 50% drop, you’d have over $100 billion.
We don’t own 9% of Amazon. As many investors say, “Capitalism is brutal.” Most businesses—even the greatest—eventually fail. Of the 20 largest U.S. companies in 1990, only three remain in the top 20 today (Exxon Mobil, Johnson & Johnson, & Procter & Gamble). Most small companies fare far worse.
Build your business like an optimist, invest like a realist. Your business might grow 10, 20, or 100 times its current size; or, it might go to zero. To achieve financial independence, regardless of your business’s outcome, invest enough outside your company to fund your lifestyle.
Financial independence frees you to think longer term. You build better businesses—most of your competitors focus too short-term. You create a better life—free from financial pressure, you improve your health, spend more time with those you love, and give more to those you don’t know. You can be the truest version of yourself. The world needs more entrepreneurial people—like you—free to contribute their greatest selves.