Best of Both Worlds: Bonds & Stocks vs. Work & Building a Business

by Kurt

There is no reason to either (a) be an employee and (b) be your own employer when (c) you can do both. While this is not always possible (particularly in high-powered, tech startup jobs that require 70-hour weeks) it is an option more often than many folks think. There is also the hybrid route of becoming a contractor or part-time worker, though even at 40 hours a week, well, there is a lot of time left for other things.

An analogy related to investment strategies seems like an appropriate one: think of your job like a bond (or bond fund) investment, and your own entrepreneurial project like a stock (or stock index). Seem like a stretch? There is more to this analogy than just correlation – a job really is an immediate term, statistically safer, lower-growth alternative to the high-flying option of ditching employment for the frightening freedoms of entrepreneurial life.

Like a bond fund, your job pays you regular dividends – these are what account for the growth, which works out well for keeping the fridge filled and lights on in the short term. It also has some core value that builds up over time, but mainly it is a relatively safe and stable way to pay the bills from day to day. This is a safe place to sit, comfortable but perhaps a bit boring knowing where the predictable path leads.

Like a stock fund, your venture is not necessarily a sure thing, either in the short or the long terms. However, history shows that stocks do perform better over the long haul on the whole than bonds. The problem is, from one month to the next they are not a reliable source of steady cash flow. Moreover, there is still the off chance your stock will never recover from a given crash. This is a scary place to dwell, with big rewards but even bigger potential losses.

But here is where it gets interesting: history shows that a regularly rebalanced stock-and-bond mix (tempered with an intelligent and age-suited asset allocation) actually performs better than either extreme. When bonds go up and stocks go down, you can use some of your bond yield to buy up stocks for the future (when presumably they will rise again). Likewise when bonds are flat but stocks are soaring, you can move some funds back to the bond side before the next bubble bursts.

To be fair, this is somewhat oversimplified … but its relevance cannot be ignored: by having a combination of more typical employment and more variable side ventures you can balance your strategies and get a bit of the best from both worlds. However the specifics work, the key is to diversify – work at different levels to keep life interesting but also spread your bets around (and try to stay balanced along the way).