If you survived the economic tsunami of the last four years, you know that not everyone lost their house, but everyone got wet, and some came out soaked to the bone. John Keynes, the influential British economist, once said “the market can stay irrational longer than you can stay solvent.” Many entrepreneurs found their businesses on the edge of survival; it could go either way.

This economic crisis forced entrepreneurs to re-evaluate everything—payroll, employee performance, management, reporting structure, costs, product or service mix, competition, and what the real market opportunities were going forward.

These evaluations, changes, and decisions had to be made as revenue fell, cash flow was compromised, and bank lending, as well as personal resources, rapidly diminished. Many owners of privately held businesses found themselves in an acute liquidity trap. They were forced to reduce or forgo their own pay and slash payroll.

Much of the investment advice offered during the prior years was proffered when the investment gurus had the economic winds at their back. In this recent economic storm, almost all asset classes were correlated and suffered similarly. Consequently, many entrepreneurs who had invested outside of their businesses found that hedge funds had onerous lock-ups, therefore diminished liquidity; real estate and stock values had crashed in lock-step; and any sale of part or all of their business (if they could find a buyer) was going to be at great loss.

So how would you go about adopting a more sobering perspective on building and protecting the asset value of their business to survive difficult economic times? Franklin Covey suggests, “begin with the end in mind.” So, let’s fast forward to an end game scenario and work backwards:

Mr. Entrepreneur, who has built the business to a $10 million revenue rate. Along the way he increased his compensation to $900,000 per year, to include base pay, retirement benefits, leases, and other credit card expenses. His vacation home is paid for and his primary residence has a $500,000 mortgage. He also has $2 million invested in the stock market.

Now let’s compare this scenario to Mr. Prudent Investor, whose first rule of business and life is to “stay out of trouble, not get out of trouble.” His second rule, given his apparent net worth, is to “stay rich, not get rich.” Mr. Prudent Investor sold his business for $10 million (or one times sales) leaving him $7 million after taxes. Combined with $2 million that he already has in the stock market, this gives him a total of $9 million in investable net worth.

He now recognizes that if he is to protect his principal, (avoid drawing down on his principal and survive the vagaries of the market), he must live within the three percent rule. That is, he must live off of three percent of his investable net worth and set aside two years of living expenses to avoid drawing down principle in severe market declines. Depending on his tolerance for risk, age, and investment philosophy, there is an infinite number of asset allocation ratios of stocks to bonds to real estate, and a myriad of esoteric investment vehicles that he might consider. And within the basic allocation in each class is a variety of permutations: small cap, large cap, corn, cotton, oil, commercial, residential, long-term, short-term, treasury-backed, dividend-paying, and so on.

What he would not do is put 80 percent in a single small cap stock and the balance in a mixed portfolio of other stock positions. That would be a scenario of great risk. However, that is exactly the position in which we found Mr. Entrepreneur when we met him. Almost his entire net worth was tied up in his business, and the balance of his portfolio was in the market.

So what are the lessons an entrepreneur is to glean from living through the economic tsunami and from Mr. Prudent Investor? Recognize the inherent risk of ownership in a privately held business, which is similar to a single-stock position in a small cap holding, and diversify away from that risk in all other investment holdings; for example, treasury-backed short-term municipal bonds.

The continual investment in his own business has proven to be a great way for an entrepreneur to build wealth as that is where he or she has the greatest control and influence on outcomes. However, as the owner, there is the responsibility to protect that asset, as well as his personal well being. Therefore, prudence suggests he also set aside two years worth of living expenses to shelter him through the next storm so that he will not find himself in a liquidity trap.

Richard Lavin is the founder of LEVERAGEDWISDOM, a peer-to-peer learning group for owners who want to increase the equity value of their businesses. He can be reached at richard.lavin@leveragedwisdom.com.