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Small Business Financial Article

Small Business Financial Article
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

Smart Investing for Business Owners

Smart Investing for Business Owners

Few things are more daunting to any of us than having to make investment decisions that will set us on an individual course largely determined by their consequences. Anyone who has experienced the treacherous stock market roller coaster ride since the global financial crisis knows the sheer terror that can come with investing. However, anyone who has followed the markets since then knows that market declines, even the worst kind, are only temporary. Since 2009, the global stock markets have roared back, producing historic returns. Investors, who stayed in the market after experiencing a 40 to 50% decline, have nearly tripled their money in that time.

The stakes are especially high for business owners with assets to preserve and protect. It is for that reason that developing the right long-term investment strategy is of the utmost importance and that usually requires more than an “off-the-shelf” solution that might be found at a stockbrokerage firm or mutual fund company. Nothing short of customized investment portfolio built with your values, objectives and risk tolerance in mind will suffice.

Practice #1: Asset Allocation

Effective asset allocation is not concerned with picking individual stocks or bonds because there is no way to consistently pick the winners. Rather, it is based on selecting the appropriate mix of assets and their weightings that conforms to your individual investment objectives. In a study conducted by Gary Brimson, called "The Determinedness of Portfolio Performance", it was found that as much as 93 percent of the variation in volatility and returns is determined not by individual investments, but by the structure of asset mix. That is to say, the actual mix of assets is far more important than the selection of any individual securities.

Practice #2: Diversification

Portfolio diversification is the recognition of uncertainty and that it is impossible to know which particular asset or asset subset will outperform another. A properly diversified portfolio is designed to capture investment returns wherever and whenever they return, while reducing the risk exposure of any one asset. It is actually a deliberate method of managing a portfolio so there is not a high concentration of risk in any one investment. To diversify a portfolio means spreading out the risk among a broad range of asset classes or securities. This can have the effect of reducing portfolio volatility while producing more stable returns over the long term.

The only certainty in investing is that it is impossible to consistently predict the winners; so the prudent approach is to create a basket of investments that provide broad exposure within an asset class. Not only will this increase the opportunities to capture more winners, it will stabilize portfolio returns in the long term.

Practice #3: Rebalancing

One of the biggest mistakes some investors make is to set and forget their portfolio. As the markets fluctuate, they can chance the asset allocation of your portfolio to the point where it no longer reflects your investment profile or risk tolerance. While it may be tempting to let your stock gains continue in a market rally, you could be increasing your exposure to risk beyond your tolerance level. For example, if your asset allocation target is 60% stocks and 40% bonds, a steep market rally could change that mix to 70% stocks and 30% bonds, thereby increasing your risk exposure.

That’s why portfolio managers perform a portfolio rebalancing once a year or so – selling off stocks that have met or surpassed their target price to capture profits and then reinvesting them into stocks that have yet to reach their target price. Annual or regular rebalancing enables you to capture gains while expanding your opportunity to generate returns in sectors that have a higher ceiling for growth.

Rinse and Repeat

Your investment strategy should be revisited at least once per year to ensure it still reflects your objectives and your risk profile. Depending on your evolving circumstances, you may consider adjusting your asset allocation or diversification approach; however, if nothing has materially changed with your circumstances, it would be important to maintain your discipline and patience in allowing the markets to work and rebalancing your portfolio to keep it in line with your long-term strategy.