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People who are self-employed know that running a business means being chief cook and bottle washer. They also need to be their own chief pension planner.

"If you're self-employed you also must be self-reliant," says Darren Coleman, senior vice-president and portfolio manager at Coleman Wealth of Raymond James Ltd. in Toronto.

"You're effectively running your own pension plan, and you need to build a retirement program with the same diligence and process that a pension plan is run," he says.

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A well-run pension plan will always have certain characteristics, Mr. Coleman adds. It should hold a variety of stocks, bonds and cash, and it should be diversified by geography, with a mix of Canadian, U.S. and international holdings.

It should also be diversified by "style," Mr. Coleman says, with a mixture of growth investments, offering strong earnings, and value investments, stocks that appear to be undervalued by the marketplace.

"Beyond investment vehicles, as a small business owner saving for retirement you also have a lot more decisions to make in terms of where you locate your retirement assets," says Markus Muhs, investment adviser at Canaccord Genuity Wealth Management in Edmonton.

It's about more than registered retirement savings plans and tax-free savings accounts, he says. "It's also how much money do you retain in your business, and how does that get invested within the corporation's balance sheet," assuming you are incorporated.

For self-employed people whose incomes are bumping into higher tax brackets, a corporation allows individuals to leave money in the corporation and pay themselves a relatively small taxable salary, Mr. Muhs explains.

But self-employed people investing their corporation's funds need to be careful, he adds. "When you're choosing investments for such a strategy, the tax efficiency of distributions [income] is key. Corporate-class mutual funds allow you to build a diversified portfolio within a corporation with minimal annual distributions."

This allows the self-employed person to defer much of the taxation on investment income until later.

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Mr. Coleman adds that self-employed investors should be cautious. Unlike teachers or municipal workers, the self-employed have no fund administrators to make careful, prudent decisions on their behalf.

As part of the disciplined approach, self-employed investors need to monitor their holdings regularly and rebalance them. "Fortunately, there are numerous programs that you can obtain that will do a lot of this work for you and at very reasonable cost," Mr. Coleman says.

"Indeed, you can start with a balanced mutual fund from your bank with $500 if you wish. That option alone will have everything you need to start building a proper, pension-like retirement program."

He reinforces the point that, "as you are already taking a lot of risk by being self-employed, it's imperative that you are prudent and professional with your retirement savings. This is not the place to be a speculator or overly aggressive."

Indeed, Mr. Muhs says that, for a small-business owner, it's "the overall risk exposure, not just in your investments but your financial life over all."

Yet, at the same time, "you cannot have the money invested so conservatively that you are working harder than it is," Mr. Coleman says.

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Self-employed people in highly cyclical businesses should consider whether most of their overall risk is concentrated in the business, or elsewhere.

"If it's in the business, you might want to temper the risk you take with your retirement investments and diversify as far away as you can from your business. Keep your retirement assets lower risk, lower return," Mr. Muhs says.

For example, "if you operate a small business in Alberta that depends on activity in the oilfields, don't invest in energy stocks."

"As portfolios grow, you can add more complexity," Mr. Coleman says.

"All of the major mutual fund companies – and many of the larger ETF providers – offer asset allocation programs to help you establish a disciplined and diversified portfolio. The key to all of this is having the right program that fits you."

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