Carrie Schwab Pomerantz

Dear Carrie: I'm a 31-year-old male and have no dependents, except for my loveable black lab. I have about $500,000 and have invested $100,000 in a slow growing, conservative fund. I'm thinking of using the other $400,000 to expand my small business when the time is right, hopefully in January 2011. Does this make sense? -- James

Dear James: Wow, with $500,000 in assets and your own business, you've achieved a lot -- especially for someone your age. And your question is especially interesting because it raises issues that go beyond the standard advice for a young person, which is generally to invest aggressively for long-term goals.

Your situation is different. Investing in your own business is, by definition, high risk. So while your portfolio may be conservatively invested, the rest of your assets are not. In fact, those funds represent only 20 percent of your assets, which puts you in the range of a moderately aggressive investor.

Traditional wisdom would be to diversify the other 80 percent of your assets across a range of investments. In contrast, using your remaining $400,000 to expand your business is putting all those eggs in one basket -- a potentially profitable but also high-risk approach.


Given that you go ahead with your plans to invest a big portion of your assets in your business, I do recommend that you balance your risk with some caution. Here's what I suggest:

-- Give yourself a big cash cushion: You've probably heard this before, but I can't emphasize enough the importance of having an emergency fund. I usually suggest keeping three to six months of expenses in an easily accessible account. However, in your case, I'd suggest you carve out as much as one to two years of non-discretionary expenses to make sure you're covered if things get rocky.

In this economic environment, getting a loan or a line of credit is more difficult than ever. So as a small business owner, it makes sense to be your own banker and set aside enough cash to keep yourself afloat if necessary.

-- Make sure you have health insurance: This is another must! You can't rely on an employer, so you have to take care of yourself. Make sure you have, at the very least, a high deductible policy that will cover you in case of an unexpected illness or accident. High medical bills could wipe out business profits in no time. At your age, you should be able to find an affordable plan.

Carrie Schwab Pomerantz

Carrie Schwab Pomerantz is a Motley Fool contributor.

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