You run a small, undiversified, mostly local operation. So you should balance it with an array of mostly large-cap companies that have national or even global markets. The easiest way to do this: Buy index funds. They're broadly diversified, inexpensive, and not sexy enough to distract you from running your company. Yes, they're boring — but the returns aren't. Even with this year's lackluster performance, index funds tracking the Standard & Poor's 500-stock index have still beaten most actively managed stock funds in the past decade.

Nevertheless, entrepreneurs love individual equities, especially risky, small-company stocks, both from natural affinity and because their focus is on return, not risk reduction. Rather than deny this inner urge to invest, it's probably better to include it in your overall plan. Some advisers recommend putting a small portion — say, 10% — of your assets aside as "play" money that you can trade at will, while the rest goes into more structured investments. For advisers, the challenge is to come up with something better in terms of both risk and reward than what an entrepreneur can do himself. "I have car-dealer clients who carry inventory loans at very favorable rates," says Steven Kaye, president of American Economic Group, a financial planner in Wachtung, N.J. "They want to buy technology stocks. They say: ‘If I want a boring investment, I can get 9.5% guaranteed on my money by paying down my inventory loans. Can you beat that?" Kaye thinks you can, with a portfolio of consumer staples — stocks that weather recessions well — that he expects will earn 7% to 15% if held until retirement.

Business owners also like investing in companies they know personally. Steven Smith, for example, owns stock in chain drugstores and other retailers that this company does business with. "I've had the chance to see and hear things that indicate whether or not they're well-managed," he explains. By all means, rely on your insight — but don't buy companies that react to the economy the same way yours does, or whose setbacks would hurt your revenue. An entrepreneur who sells to the microchip industry might want to avoid the stock of Intel, or else he risks a double whammy to both his income and his assets when that industry goes into one of its periodic swoons.

The same caveats apply to regional diversity. Entrepreneurs often invest in real estate for cash flow, capital appreciation, and personal control. Take Dan Thompson, president of Vend Alaska, a vending machine company in Anchorage. Thompson has about half his net worth in his company and the rest in local properties and in the stock of a local bank where he's a board member. "It's an investment that I can shepherd," he says. "I have some control over my destiny. I'm an active participant." And he recently bought shares in the National Bank of Alaska to spread his risk across the state.

That's a step in the right direction, but it doesn't go far enough, says Elkin: Thompson should invest outside Alaska. His company, his real estate, and the bank are all likely to suffer in a local downturn. reit mutual funds or bonds are a more liquid and diversified source of cash flow.

Steve Smith says he has gotten past that. He's still managing his stock portfolio, but he recently turned his retirement account over to Marilyn Bergen of Portland's Capital Management Consulting. "We use a lot of index funds," says Bergen, "and I tend to underweight small company stocks for a small business owner, especially if the business is worth a great deal more than the rest of the portfolio." Says Smith: "It's worth paying half a point to have a professional manage the account. When I'm working on something with a potential 1,000% return, I don't want to get distracted by something that pays much less." That's the beauty of a strategy for entrepreneurs: It lets you spend more time and take more risk on the one investment — your business — that's likely to pay off best.

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