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The lingering effects of the Great Recession and financial crisis have become a constant reminder to small business owners of just how tenuous their financial security can be when it resides primarily in their business. Although confidence is gradually being restored among small business owners, many are heeding the lessons of the economic downturn and taking steps to gain more control over their financial future by increasing their personal investments outside of their business. However, while they are skilled and confident in managing their business, they often lack the necessary acumen and the time to manage an investment portfolio.
Business Owners Need a Sound, Long-term Investment Strategy
As it turns out, the best investment strategy for business owners is a relatively simple approach that relies less on skills and knowledge and more on patience and discipline. By following three simple, proven investment practices, any business owner can develop and implement a sound, long-term investment strategy designed to achieve steady returns while minimizing risk. But, it must start with clearly defined goals and targeted objectives with a specific time horizon, so you can determine how much you need to invest, what rate of return is needed on your investment and how much risk you will need to take in order to achieve that rate of return.
Practice #1: Asset Allocation
At the core of any investment strategy is the long-term mix of your assets. Understanding that different asset classes behave differently in various market or economic environments is the premise behind an asset allocation strategy; and achieving the right asset mix will enable you to capture returns whenever and wherever they occur. For example, when foreign stocks are performing well, large U.S. stocks may not; however, if your mix includes some of both, your portfolio will still benefit, and its overall volatility will be reduced.
Your asset allocation strategy should seek to achieve the optimum mix of assets, including your business (if you count it as an asset), that will generate constant returns.
Practice #2: Diversification
Diversification is the spreading of risk and reward within an asset class. Essentially, diversification is the practice of deliberate uncertainty, recognizing that it is virtually impossible to know which particular stock or mutual fund is likely to outperform another. Broad diversification seeks to capture the returns of different types of investments in all of the sectors over time but with less volatility at any one time. If your business comprises the bulk of your assets, it’s difficult to achieve any level of diversification, which is why it is important to create assets outside of your business.
Practice #3: Rebalancing
The third investment practice is rebalancing which is what keeps your overall investment strategy intact as the market fluctuates. Through market fluctuations, your asset allocation will change frequently which could cause your portfolio assets to fall out of alignment with your asset allocation targets. This could expose your portfolio to more volatility and it can also limit your upside in asset classes that have increased in value. When you rebalance your portfolio, you sell off investments that have exceeded their target and buy assets that have fallen below their targets. That way, you always maintain your asset allocation target, and, equally important, you will always be buying low and selling high.
Truth-be-told, investing “done right” is not that complicated - Set goals, allocate, diversify and rebalance yearly. Then rinse and repeat. And, most importantly, don’t veer from the strategy. It is so easy in fact, that the notion of simply doing it yourself can be tempting. However, the stakes are so high that the even the smallest mistake or temporary break from strategy can derail your financial future. The best investment advice for business owners is to work with an objective, independent financial advisor in developing and implementing a sound, long term investment strategy.