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save particularly heavily during high earning periods because their future earning potential is unpredictable.

Regardless of career path, at early career stages, savings should be earmarked largely for growth in a diversified portfolio of equities. A significant chunk of that savings can and should benefit from being locked into tax-advantaged retirement plans. In a traditional retirement plan, earnings are contributed pretax. Within the plan assets grow tax-free, sometimes for many decades. Only when assets are withdrawn will earned income tax be payable. In “Roth” plans, taxes are paid currently on contributed earnings, but within the plan assets grown tax-free and there is no tax due upon withdrawal.¹ Investing in Roth plans is particularly advantageous when your current tax rate is low and when you expect to have higher earnings in later years that put you in higher tax brackets. Roth plan assets are not only protected from higher future tax brackets, they are also protected from future legislated tax hikes.

As an incentive to save more, many corporations will match their employees' contributions to retirement plans up to a specific level. If your firm offers this benefit, your decision to save more actually earns you extra compensation. It's as close to free money as most of us ever get and it will compound tax-free for decades. Take full advantage of that benefit if it's available.

      Higher earners may need to put some of their savings in taxable accounts because there are caps on how much they can contribute each year to retirement plans. In this way, they not only diversify their assets, they diversify tax rates on the profits generated by those assets. We will delve more deeply into both points later.

      As successful careers develop, the shift from intangible assets to tangible assets accelerates. For those who mostly earn income, or receive dividends from concentrated stock positions, regular addition to savings enables you not only to grow financial assets, it causes you to invest those assets in all kinds of market conditions. Sometimes markets are strong and getting stronger. Sometimes they are about to crack into a bear market. Sometimes you invest near the bottom of the market cycle. Since it is very difficult to optimally time when to add money to financial markets, regular contributions over years and decades lower the risk and add “time diversification.”

      Time diversification is good for another reason. You gain experience managing financial assets, first with small amounts of money and then larger ones. You learn to work with, and to assess, financial advisors. You gain experience evaluating your own attitudes towards risk through market ups and downs. Do you see market downturns as opportunity to buy good assets at lower prices or do they cause you to lose confidence in your financial strategy and in the people you work with to execute it?

      When you own a concentrated position in a business there are several ways to diversify. You can use excess cash flow to diversify and grow within your business – geographically, by customer type, by product; through organic growth or by acquisition. Alternatively, you can distribute excess cash flow in the form of regular dividends or periodic refinancing proceeds to diversify outside the business, including into financial assets. Lastly, you can diversify by selling all or a portion of the business, paying capital gains taxes and reinvesting the net proceeds.

Deciding when and how to sell your concentrated position can be a major strategic and emotional decision, not just straightforwardly financial. Selling enables you to diversify your assets and build a nest egg independent of the business's success, but it's not a costless or riskless decision. This form of diversification comes with big tax payments. In the special case where you sell a big chunk of a business, you could lose control of a cherished enterprise and need to replace income streams that you had enjoyed.

      One of the most important things my senior colleagues and I do is to help our clients think strategically across the business, financial, and cultural dimensions of their situation when making big decisions like this. We help them to prepare for sale, to identify presale estate and charitable planning opportunities, and to design a process to maximize value. Careful economic analysis of the timing, benefits, and risks of each pathway (concentration versus diversification), as well as thoughtful discussion of the impact on a family's culture, should not to be taken lightly. There are also questions of how to replace the economic engine and the cash flow that it generates, especially after the government has extracted a big tax bite out of the sale proceeds.

      In other words, think twice before selling your business interests. A few years ago, I gave a lecture at Harvard Business School (HBS) reunions. Within a minute of explaining why thinking twice before selling was a good idea, I could feel the cell phone in my pocket vibrate. The text message said, “Please, can we talk today.” After my lecture, we spoke for thirty minutes. It turns out the person who reached out had received what felt like a generous unsolicited offer to buy his business, and he had signed the letter of intent to sell without thinking through the implications. Listening to me, he realized this was a big mistake.

There are certainly business and personal considerations associated with the decision to sell. But it is also important to think deeply about tax and estate planning opportunities and risks. Considering sale to an unaffiliated strategic or financial buyer when financial markets are ebullient, the business is performing well, and valuations are high, can be advantageous. In contrast, if you want to transfer assets from one generation in your family to the next, it's generally to your advantage to do so when valuations are near cyclical lows. It is also wise to utilize estate planning techniques when your equity is illiquid, and the business has not been optimized for maximum sale value. And there are tax consequences, especially with outright sale, not the least of which is, do you close the sale in late December or early in January the following year? If you decide to sell, are you prepared to reinvest the sale proceeds? Do you reinvest them all at once or over time? How will you replace the income you generated from your concentrated equity position after you've paid all those taxes? If you're a founder or inheritor of a family business, what will be the emotional and cultural impact on you and the family of selling the business? These are critical questions this HBS entrepreneur hadn't asked until he was deep into the sales process.

      During the sale of a family business there are especially large planning implications. Selling a business outright may be exactly the right thing to do, but be prepared for the consequences across business, financial, and cultural dimensions. Some entrepreneurs and business owners feel a vacuum in their purpose and family culture after the business is sold. The fiscal responsibility imposed from the illiquidity of owning and operating a business can evaporate upon sale. Finally, many sellers of businesses have neither the experience, nor the infrastructure, nor the technical skills, nor the passion or inclination to manage a substantial bolus of cash. Liquidity events reduce risk in some ways, but they increase it in others.

      Upon learning that someone is selling their business, it's natural and courteous to offer one's congratulations. But be prepared for an unexpected reply from self-aware sellers. “Why are you congratulating me? Yesterday I knew what business I was in. Today, I am in the investment business and I know nothing about it.”

In my experience, the challenge goes deeper. The instincts one develops to succeed in business are often contrary to the intuition one builds to succeed as an investor. Most successful business operators allocate capital to their winners, they aren't contrarians, and they are highly sensitized to momentum. They focus on what has worked and do more of it. They cut their losses quickly. Revenue growth, operating margins, return on invested capital, and cash flow are key metrics of success. Whether their company stock is public – with minute-to-minute pricing – or private, they know instinctively that long-term business performance can be disconnected from the stock price for extended periods.

      Translating that mindset to investing is challenging. Business operators are inclined to get investment timing wrong because they are more sensitized to momentum than to value or growth at a reasonable price. Many find that being a contrarian is constitutionally challenging. They view turbulent financial markets as a reason to disengage rather than an environment to seek opportunity. In addition, like most of the rest of us, they have selective memories and prefer to focus on their winners, not their losers. It's certainly the winners that get talked about, but without measuring aggregate results

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